How Can Traders Adjust to the Pandemic?

The situation remains complex and unpredictable today. However, we now know more. We know that the economic crisis will indeed be a long-term issue for most major nations.

CapitalWatch Staff
    Aug 01, 2020 4:10 AM  PT
How Can Traders Adjust to the Pandemic?
author: CapitalWatch Staff   

This past spring, much was written about how investors should handle the pandemic and resulting economic upheaval. Really though, it was also too soon for there to be much logical insight on the matter. The pandemic was still largely unrecognized for what it would become; we still weren't aware how different nations would react; and while the IMF forecasted a recession, we weren't actually in one yet. There just wasn't much that could be said with certainty.

The situation remains complex and unpredictable today. However, we now know more. We know that the economic crisis will indeed be a long-term issue for most major nations. We also know that the coronavirus is continuing to severely interrupt life and industry in many of those same nations. Just recently, the Philippines was declared a hot spot, indicating that lengthy lockdowns will continue; European countries remain subject to some restrictions; and in the United States, increasing cases of the coronavirus may lead to stalled or reversed reopenings also.

None of this further understanding yields certainty regarding investment strategies. Now that we know a little more though, we can speak more clearly to how traders can adjust.

The following are a few specific strategies worth considering.

Look to Commodities

Commodities are not immune to suffering in the midst of a pandemic and recession. In fact, most of the commonly traded commodities crashed alongside world stock exchanges. Oil, as you may have heard, crashed historically, such that some analysts suggest it could be permanently crippled. But other commodities rebounded efficiently. Gold, for example, has once again proven to be a safe space for investors in a treacherous time. The state of gold is strong today, and there's reason to believe its value could withstand a "second wave" of COVID-19 as well (making for a W-shaped recovery).

The point of looking to commodities, however, isn't necessarily just to find the ones that are resilient. Rather, it's to start assessing markets that are marginally less complex than most stocks (which tend to depend on more variables). A given stock can be affected by any number of factors, from product supply, to company reputation, and so on. Commodities can depend on numerous factors as well, but tend to be at least somewhat more straightforward. While things like consumer spending and commuter activity affect assets like gold and oil respectively, and can certainly be influenced by the pandemic, information tends to be more direct. You may be more likely to know how a given piece of news will affect a commodity than a stock.

Trade Trends - Not Assets

When an investor or trader buys an asset, there's an inherent risk that said asset can plummet. A significant amount invested in a stock or commodity can quickly turn into a drastic loss, and sometimes all it takes is a single news story. By trading on trends rather than assets themselves though, an investor can mitigate this risk. A loss will still be a loss, but the extent of it might not be as severe.

We're talking specifically about commodity futures CFD trading — which is actually a practice linked to commodities, to tie it to our previous suggestion. The idea here is to trade on the idea of where an asset might be headed, rather than buying that asset and going along for the ride. This is done via the arrangement of a contract that will pay traders a return if and when they correctly predict direction over time.

This can be preferable during a difficult situation because it can mitigate particularly sharp losses, but also because traders can profit in both directions. A CFD can be designed for a loss as well, such that a savvy trader can also profit off an asset performing poorly doing a pandemic.

Find Thriving Industries

The other strategy that some traders are taking advantage of is to find companies and industries that are actually thriving because of the pandemic. While it's generally correct to assume that a majority of businesses have struggled in 2020, there are in fact some that have seen business spike.

In some cases this is because of new business opportunities that have arisen as a result of the events of the year. Delivery services, online entertainment, remote healthcare, and digital education have all grown more significant in our world, for instance. While these are not entirely new businesses, many related companies — from Tencent, to Netflix, to Zoom — have thrived as a result. Some of these companies have already proven to be worthy investments.

Ultimately, there's still a great deal of uncertainty in investing in 2020. With a little more clarity about what we're facing though, it's getting easier to assess markets. In doing so, the ideas above emerge as some examples of how traders can adjust.

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