Do you think the stock market could crash again? Join the club. A Bank of America survey of 200 fund managers in May found that over two-thirds of them see the current rebound as only a "bear market rally."
The possibility of a second downturn raises the question of what investors should do in case the gloomy predictions come true. You could go fully to cash. However, there are better alternatives. Here's where to invest $1,000 if you're worried the stock market might crash again.
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1. U.S. Treasury bonds
There's arguably no safer place to park your money than in long-term U.S. Treasury bonds during a down market. You could simply buy the bonds outright. Another option is to buy shares of exchange-traded funds (ETFs) that own long-term U.S. Treasuries.
Three top long-term U.S. Treasury bond ETFs are iShares Barclays 20+ Yr Treasury Bond ETF (TLT 0.54%) , SPDR Portfolio Long Term Treasury ETF (NYSEMKT: SPTL), and Vanguard Long-Term Treasury Index Fund ETF (VGLT 0.43%). All three ETFs currently pay yields of around 2%.
However, the goal of investing in long-term U.S. Treasuries in anticipation of another stock market crash isn't to collect a small amount of money while you wait on the sidelines. Investing in U.S. Treasuries or related ETFs provides a way to make sizable gains when the market goes south.
During the stock market crash earlier this year, long-term U.S. Treasury ETFs rose by at least 14% from peak to bottom while the S&P 500 index plunged nearly 34%. And during the subsequent stock market rebound, the ETFs have only given up around 2% of their gains. Keep in mind, though, that U.S. Treasuries aren't completely safe. They can and sometimes do generate greater losses than have been seen since the stock market bottomed out this year.
2. COVID-19/recession plays
Another way to profit if the stock market sinks again is to buy stocks that are good recession and COVID-19 plays. If the market tanks, it's likely going to be either because of escalating concerns about the COVID-19 pandemic or the recession that the viral outbreak has caused. I'd rank Dollar General (DG -0.16%) as a top pick to perform well in either scenario.
Dollar General's sales boomed in the first quarter of 2020 not in spite of but instead because of the COVID-19 pandemic. Shoppers stocked up on must-have items such as food, paper goods, and cleaning products. The company's stores were designated as essential businesses across the country. If there's a major second wave of outbreaks in the fall as some fear, look for Dollar General to turn in a repeat performance.
Even if COVID-19 concerns taper off, the economic aftermath of the outbreak will remain. As a discount retailer with stores practically everywhere, Dollar General would be a natural winner as consumers tighten their purse strings.
What if the economy gains momentum, the coronavirus becomes a less-serious issue, and the stock market surges? No worries. Dollar General CEO Todd Vasos noted in the company's Q1 conference call that "we do very good in good times and we do fabulous in bad times." And he was right.
3. Gonna-grow-regardless stocks
You don't have to focus exclusively on stocks that specifically benefit from COVID-19 and/or a recession. There are some stocks that are just going to grow regardless of what happens. Vertex Pharmaceuticals (VRTX 0.25%) is a great example.
There are four FDA-approved drugs that treat the underlying cause of cystic fibrosis (CF). All four belong to Vertex. Its newest CF drug, Trikafta, is off to a barnstorming start, raking in $895 million in its first full quarter on the market. The company awaits European approval of Trikafta, which would almost certainly spark another revenue surge.
While CF has been the fuel behind the meteoric rise for the biotech stock, Vertex is working hard to expand into new arenas. It's partnering with CRISPR Therapeutics to develop a gene-editing therapy that holds the potential to cure rare blood diseases beta-thalassemia and sickle cell disease. The company is evaluating experimental drugs in phase 2 studies for treating two other rare diseases, alpha-1 antitrypsin deficiency and APOL1-mediated kidney diseases.
Wall Street analysts look for Vertex to deliver average annual earnings growth of close to 24% over the next five years. That estimate seems quite attainable, in my view. And it should come whether there's a worsening of the economy or the COVID-19 situation.
