It’s time to buy stocks more aggressively.
That’s the case for stocks in general, but also cannabis stocks. Most cannabis companies aren’t really affected by tariffs. But their stocks have been hit recently by the shift to “risk-off” mode among investors.
As the tariff issue gets resolved, investors will transition back to “risk-on” mode, which will help more speculative sectors like cannabis.
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Here are seven reasons why investors will shift to risk-on mode, in my view.
7 Reasons to Buy Stocks as Investors Shift “Risk-On”
1. Stock investors recently hit panic mode. The VIX fear gauge spiked to over 50. That’s a rare level only seen during very troubling times like the Great Financial Crisis. There have also been several magazine cover indicators, or instances of media that don’t normally cover the markets prominently featuring news about the selloff. This is another sign of extreme negative sentiment. Normally, when sentiment hits extreme negativity like this, it is a time to buy.
2. Valuations look a lot better. The S&P 500 trailing price/earnings ratio has fallen to 20 from 26. The Nasdaq 100 Index p/e is down to 26 from 35. These are levels last seen early in the bull market, during September 2023. “This emotional stock market collapse has already greatly improved the valuation profile in just a few weeks,” says Jim Paulsen, an economist and strategist who writes Paulsen Perspectives on Substack.
3. Even without Fed easing, economic stimulus is kicking in. The ten-year rate has fallen to the low 4% range. Oil, commodity prices and the dollar have fallen sharply. A growing liquidity preference among investors and companies will create money supply growth. All these changes will help dampen any slowdown and avert recession, believes Paulsen. He also thinks financial strength among consumers and companies will help avert a recession. The typical balance sheet vulnerabilities that contribute to recessions are absent. As growth slows, fiscal stimulus can ramp up in the form of increased government benefits payments.
4. David Giroux, who manages the outperforming T. Rowe Price Capital Appreciation fund (PRWCX), tells me that proprietary internal models suggest support will be found when the S&P 500 hits 4,900. We are there. This is an attractive buy level, according to their models, as long as you have a medium-term time horizon.
5. So far, this crisis is not linked to systemic problems like irresponsible lending or excessive debt. Instead, it is self-induced. That means it can be easily reversed. Severe market declines around the globe are putting pressure on all governments to come to some sort of compromise on tariffs. “One can argue that unless the endgame of policymakers is global recession, negotiations are likely and could be positive catalysts for markets,” say strategists at Bank of America. “But leadership caving to the US would be impolitic, and negotiations that can be cast as win-wins may be hard to get done quickly.”
6. Ed Yardeni of Yardeni Research notes that at least one lawsuit now challenges President Trump’s authority to cite a national emergency to impose tariffs by executive order. At the very least, a temporary restraining order against tariffs is possible, while the issue gets kicked up to higher courts.
7. Polls showing voter displeasure with Trump policies could raise concerns among conservatives about losing Congress in the midterms. This might pressure Trump to find a way out on tariffs.
The bottom line: This is now more of a time to buy than sell. Sentiment recently hit extreme negative levels. Yet the potential for negotiated compromise on tariffs remains. I recently highlighted several cannabis lenders that have been hit hard in the current selloff, even though they seem to have adequate real estate collateral against their loans, and spending on products like cannabis, alcohol and cigarettes tends to hold up fairly well in slowdowns. For more on these cannabis lenders, consider subscribing to Cabot Cannabis Investor here.
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