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This Concerning Trend Could Hint That Another Market Sell-Off Is Coming

By Keith Speights – Aug 23, 2020 at 6:07AM

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A recent CDC report spotlighted a problem that might soon get much worse.

You can find plenty of good news without looking too hard. The stock market is soaring. COVID-19 cases in the U.S. are declining. Robert Redfield, director of the Centers for Disease Control and Prevention, predicts that death rates could fall significantly within the next couple of weeks. The Food and Drug Administration recently approved emergency use authorization for a saliva COVID-19 test that could be a game-changer because of its convenience and low cost. 

If you think there's a "but" coming, you're right. 

All of these developments are definitely good news for a pandemic-weary American public. But more bad news could be right around the corner -- possibly including another stock market sell-off.

A disappointed-looking person holding a hand to their face with a coronavirus molecule and declining stock charts in the background.

Image source: Getty Images.

Kids and COVID-19

The CDC recently reported that the numbers of COVID-19 cases in children in the U.S. "have been steadily increasing from March to July 2020." This trend is concerning, but hasn't been viewed as a major problem thus far because there have been far fewer cases of COVID-19 in kids than in adults.

As of Aug. 3, 2020, only 7.3% of all COVID-19 cases in the U.S. were among children ages 17 and under. That's not as bad as it could be, particularly considering that children make up 22% of the total U.S. population. The data also suggests that kids tend to experience less severe cases of COVID-19 than adults do.

The CDC thinks that COVID-19 rates among children have been relatively low in large part thanks to school closures in the spring and early summer this year. However, students are now returning to schools across the country. Even with schools taking preventive measures and offering hybrid on-site/online classes, it's possible that the trend of COVID-19 cases in children will accelerate dramatically over the next few months.

CDC evidence suggests that children spread the virus to others. This means that teachers, parents, and others with whom infected kids come into contact could get sick and potentially infect even more people.

Why a market downturn could be on the way

Investors have focused on positive developments over the past few months. Media reports have focused on COVID-19 vaccine candidate progress. Businesses have focused on reopening. Life hasn't exactly returned to normal, but there are hopeful signs. 

But the return of students to schools could spark a resurgence in COVID-19 cases. In addition, flu season is on the way. The U.S. experienced a mild flu season in 2019. But it's possible that this year's most prevalent flu strains will be much more severe, presenting a double whammy to the nation's healthcare system.

Faced with the combination of a bad flu season and a novel coronavirus pandemic, state and local officials could feel that they have no choice but to reinstate the lockdowns and shelter-in-place orders imposed earlier this year. In this scenario, another market downturn would be almost certain.

Even with these real threats, the CDC still thinks that it's important for children to return to school. The agency stated in July that "the harms attributed to closed schools on the social, emotional, and behavioral health, economic well-being, and academic achievement of children, in both the short- and long-term, are well-known and significant."

Your best moves

What should investors do with the country seemingly between a rock and a hard place? For one thing, don't panic too soon. It's possible that the situation won't be too bad, especially if schools react quickly if and when COVID-19 outbreaks occur.

But you can also be proactive. If the prospects of another major market decline really worry you, consider buying shares of the iShares 20+ Year Treasury Bond ETF (TLT -0.34%). This exchange-traded fund (ETF) tends to move higher when stocks fall.

An even better move might be to buy stocks that are in a great position to perform well regardless of what happens with the COVID-19 pandemic. I especially like Dollar General (DG 0.35%) and Vertex Pharmaceuticals (VRTX -1.01%).

Dollar General is a discount retailer that enjoyed a boom in business during the lockdowns earlier this year. The company also is a good recession play since consumers are more likely to look for low prices during tough economic times. However, Dollar General's expansion strategy should help it do quite well in good times, too.

Vertex claims a monopoly in treating the underlying cause of cystic fibrosis (CF). It received great news last week with European approval of its newest CF drug, Kaftrio. The biotech stock appears to have a compelling growth runway over the next few years that's immune to the impact of the coronavirus.

Yes, bad news could be on the way. However, as investors have already seen both this year and in the 2008 financial crisis, you might not have to wait very long for good times to return.

Keith Speights owns shares of Dollar General and Vertex Pharmaceuticals. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.

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