Since the COVID pandemic hit in early 2020 and changed the entire global economy in profound ways, it’s hard to say what lies ahead for the post-pandemic era. This is especially true for investors who look to the last half of 2021 to get back into the securities markets, or to enter them for the very first time. With fears of inflation, people and corporations act differently. And one thing about the post-COVID period that pretty much everyone agrees on is inflation.
Prices have already started going up in many sectors, namely manufacturing, retail, automotive, and more. What does that mean for traders and investing enthusiasts? It means that inflation will be a fact of life, at least for the next several months. Additionally, there will be some good opportunities as well as challenges in the upcoming trading season. Here’s are some of the key facts to keep in mind if you intend to purchase or trade securities in 2021.
When the entire economy’s price levels rise, stocks that pay dividends often suffer. That happens for two reasons. First, the amount of cash shareholders receive in payouts has weaker buying power. Second, companies tend to lower the amount paid out or temporarily eliminate dividends during inflationary times.
It’s important to remember that there are many kinds of securities, some of which do well in times of rising prices and volatility, and some that do poorly. For long-term investors who gravitate toward shares that come with dividends, a short-term cycle of economic turbulence is not such a big deal. But, for swing traders and people who make a living off of corporate payments like dividends, even a short economic downturn, along with high price levels, can cause a lot of suffering.
In inflationary times, and during periods when unemployment is higher than usual, people who want to add to their portfolios have to be careful. Often, they use buying leverage to empower whatever amount of capital they have at their disposal. If your broker offers you buying leverage, consider yourself lucky. But, don’t assume that it’s always wise to use as much of it as possible.
That’s because there are pros and cons of leverage trading. For instance, you can magnify potential profits, which is obviously a benefit. But in risky markets, like the ones we’re currently operating in, it’s usually smart to employ minimum leverage, or none at all. Even small losses can become large ones very quickly when your buying power is amplified two, three, or more times.
When crisis situations like the recent pandemic hit global economies hard, there’s usually a bounce-back period of rising prices, unemployment, and general turmoil in the financial world. It’s quite possible that the current price levels, higher-than-usual unemployment, and economic uncertainty will begin to evaporate within several months. Indeed, there are already signs that the harshest effects of COVID are beginning to abate. In large cities where vaccines have been widely available, many people are returning to work, schools are reopening, and small businesses are seeing a return to normal income, or something very close to normal.
Is this a time to sit it out, and refrain from getting involved in the buying and selling of securities? For extremely conservative types, it might be. But, it’s probably better to focus on shares and companies that are already returning to profitability and consider them to be potential candidates for portfolios.
As a general rule (with many historical exceptions, however) in periods of rising prices, stocks tend to be risky investments. But, for people who want to hone in on opportunities among the chaos, value stocks often do quite well because they are viewed as a safe haven amid overall instability. What kinds of companies suffer the most when price levels are rising? Growth, high-dividend, and other income-based shares often suffer. The bottom line is that there are always a few opportunities no matter how high or low-interest rates go, and no matter how much prices rise or decline.
Serious investors always spend time researching the companies they intend to invest in. When the global economy is coming out of a unique historical event, as is the case right now, it’s even more essential to perform due diligence on any shares you plan to buy. Volatility in the markets can be a good time to learn the importance of research, planning, and prudence.