There was an ominous start to the trading action this week, even before global markets opened on Monday. The FOMC slashed interest rates (again) by 100 basis points on Sunday evening, to a range of 0% to 0.25%.
The fact that the Fed didn’t wait until Wednesday’s scheduled meeting spooked investors and led to a 3,000-point decline in the Dow Jones Industrial Average.
To help quell investor fears, Chairman Powell & Co. have additionally pledged stimulus funds to ensure that commercial paper, money market, mortgage-backed security, municipal bond, and other key funding markets continue to run in an orderly manner.
The Federal government is also reportedly talking about granting $1 trillion-plus of direct relief to individuals and businesses, in the form of tax cuts and a potential bailout of the airline industry.
So, while the S&P 500 index shed 15% this week, there’s reason to believe these actions have started to stem the tide of selling and help global markets find a reasonable level of equilibrium.
Coronavirus Update
The main driver of volatility these days remains fear of the global spread of the coronavirus. At this point, the number of global cases is over 270,000 with more than 11,000 deaths reported. That figure includes over 18,000 cases in the U.S., where 233 have died.
“Social Distancing” and “Shelter in Place” are the new terms on everyone’s minds these days. Italy remains closed for business and most EU members have closed their borders.
The U.S. economy also appears to be systematically shutting down. On Monday, San Francisco was the first major city in the U.S. to mandate that non-essential businesses close and residents stay at home, outside of emergencies.
The entire state of California followed suit on Thursday and was matched by Illinois, New York, and New Jersey on Friday.
The effect of these closings will almost certainly send the domestic economy into a recession in 2020, even if the coronavirus pandemic does not have as much of an impact as some experts fear.
How investors prepare for this depends on 1) how long the pandemic lasts and 2) individual risk tolerance.
What to Do Next Week?
Volatility is truly at unprecedented levels; the VIX index touched a fresh record high on Monday and the S&P 500 and moved more than 4%, for nine of the past 10 trading sessions.
For the time being, it’s important for investors to remember when volatility is high that cash is king. In its simplest form, this means having extra cash at your disposal, to take advantage of near-term price disruptions in the markets.
It’s also important to remember that diversification is key for all investment portfolios. Even better than a steady dividend stream, diversifying across sectors, company size and growth/income is the best way to smooth out sizable shifts in any one area of the economy.
We know that deciding what and when to buy can be challenging for any investor, especially when volatility is on the rise and sentiment can quickly shift from Bull to Bear.
However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.
One such Agriculture name that pays a solid dividend, is worth a closer look and is our Stock of the Week.
Stock of the Week: Archer Daniels Midland (ADM)
The company processes agricultural commodities and has been in business for nearly 120 years.
The stock fared better than the broader market this week and we believe the relative outperformance can continue throughout 2020. Here’s why:
Earlier this month, Archer Daniels Midland was upgraded at Monesss Crespi & Hardt, from Sell to Neutral.
According to TipRanks, 6 other active analysts rate the company a Buy. The average price target of $50.40 suggests 64.7% upside potential from current levels.
Back in January, management posted quarterly results that exceeded expectations. Archer Daniels Midland earned $1.42 a share in the fourth quarter of 2019, as revenue increased 2% from a year ago, to $16.33 billion.
Upside in the period was driven by profit growth in the Nutrition segment. The company is also a direct beneficiary of an improved trade relationship between the U.S. and China.
This increased business confidence allowed management to boost the quarterly dividend in January, to $0.36 a share (4.7% yield). Archer Daniels Midland can cover the payout with 43% of expected 2020 earnings of $3.34 a share.
Consensus analyst estimates call for annual profit to grow by an average of 15.6% over the next two years. In the meantime, the company is valued at just 9.2x expected full-year earnings, compared with the industry median of 13.4x.
One investor that sees value in the shares is the famed George Soros. The hedge fund manager nearly tripled his stake in Archer Daniels Midland last quarter, to 1 million shares.
In the meantime, it’s worth noting that ADM carries a Smart Score of 10/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.
On top of the positive aspects mentioned already, the Smart Score indicates that the company has improving sentiment from financial bloggers.
FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks.
You may also want to learn more about how we use TipRanks indicators to find stocks that are primed to outperform. Discover the Smart Investor portfolio here >>
Wishing you a world of investment success!
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