A stock market sell-off is a period when stocks suddenly starts declining. It happens when there are more sellers in the market than buyers.
A good example of this is shown in the chart below. After staging a strong bullish trend, the index suddenly declined in September 2021.
It goes without saying that, in these situations, a large number of stocks are not easy to trade and we, as traders, may suffer some losses. But this does not apply to all stocks! There are some, in fact, that can be profitable even during a market sell-off.
In this article, we will look at some of the safe stocks to invest in during a stock market sell-off.
Characteristics of safe stocks
To be clear. In a major market sell-off, many stocks will often underperform because of how syncronized the market is. This means that many stocks, regardless of the sector will underperform when there is a major sell-off. Still, there are several characteristics of companies that will give you some safety when you invest in them.
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Soild balance sheet
First, companies with a solid balance sheet will be excellent investments during a major market sell-off. These are companies that have low debt and high cash balances will do well.
For example, a company like Berkshire Hathaway has more than $120 billion in cash. This means that it can continue doing well for a long time when there is a market crash.
Financial crisis beneficiaries
Second, you should look at companies that benefit directly when there is a major financial crisis. A good example of this is a company like Houlihan Lokey, which is an investment bank that makes most of its money in restructurings. Indeed, it was called upon to help the winding down of Lehman Brothers, Enron, and Evergrande.
Third, look at companies whose products are bought in all market conditions. A good example is consumer staples like Procter & Gamble, that sells products like Pampers, Ariel, Downy, and Always. These products are bought by customers at all time.. and they are also prepared to pay a premium price for the products.
Finally, at times, looking at companies with a safe dividend can help you out weather the storm. Besides, when there is a major sell-off, the dividend yield will go up.
Causes of a stock market sell-off
A stock market sell-off is caused by several factors. Some of the most common causes are:
- Federal Reserve - In most cases, stocks tend to do well when the Fed is implementing an easy money policy. Therefore, a stock market sell-off can happen when the bank suddenly shifts its tone and becomes hawkish.
- Structural issues - A stock market sell-off could happen because of structural issues such as major issues by a certain company. For example, in 2021, a stock market sell-off happened as investors worried about Evergrande, the most indebted real estate company in the world.
- Global issue - A stock market sell-off can happen because of a major global issue such as a global pandemic.
- Bubble burst - At times, a stock market sell-off can be triggered by a bubble that bursts. For example, in 2000s, a sell-off happened because of the dot com bubble burst. Similarly, a sell-off happened in 2007/8 because the bubble in the housing market burst.
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Examples of safe stocks during a sell-off
In a stock market sell-off, good companies that have a reasonable growth, good balance sheet, and strong cash flows will keep doing well. Let us look at some of these stocks.
Facebook is a company that operates some of the biggest social media brands in the world like Facebook, Instagram, and Whatsapp. The company has billions of users from around the world. It has also become the second-biggest advertiser in the world after Google. Most importantly, it has one of the best balance sheets in the world. Therefore, the company will keep doing well regardless of the market conditions.
The only exception is when all of them go down at the same time. In that case the stock loses, indeed.
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Alphabet is the parent company of Google, YouTube, and Android. The company makes most of its money from advertising. In the past few years, its non-search business like Google Cloud has been in a strong growth path.
Like Facebook, it has a strong balance sheet, a strong brand, and uncorrelated business strategy. Therefore, if the stock falls, it creates a good opportunity to buy the dip.
Microsoft is another company that will always do well regardless of the business conditions. This is because the company makes most of its income from other companies.
It is the second-biggest cloud computing company after Amazon. It also has a solid balance sheet and strong cash generation capabilities. Therefore, it will continue doing well in all market conditions.
Procter & Gamble and Unilever
P&G and Unilever are some of the biggest consumer goods companies. Their products are sold in almost all countries globally. They are also some of the most trusted brands. Therefore, since these companies sell necessities, their share prices will do well in all market conditions.
LVMH is the biggest luxury goods company in the world. It owns brands like Louis Vuitton, Moet, Tiffany, and Tag Heuer, among others. Luxury brands cater to the world’s richest. Therefore, their demand is always high because of the amount of wealth that has been created in the past few years.
In this article, we have looked at what a market sell-off is, what causes it, and the qualities of companies that you should invest in when there is such a sell-off. Having reached this point, you can also move on to see some profitable strategies to use during a market sell-off.
External Useful Resources
- Do's and don'ts during a stock market sell-off - CNBC