When the unexpected strikes, the stock markets usually take a hit. 2001’s dot-com bubble, the U.S. housing market crash, and the 2008 Zimbabwe hyperinflation are all examples of black swan events – almost entirely unforeseeable curve balls, and catastrophic in their effect on the stock markets.
Unfortunately, the very nature of a black swan event renders it next to impossible to predict. That said, the following two distinct threats could converge with ongoing factors such as the U.S.-China trade war to make for the perfect storm.
Where could the risks come from? One distinct possibility is that the dual threats of overvaluation and a sudden loss of appetite for risk may come home to roost simultaneously. In this scenario, sell-offs in once highly prized investments, such as some distinctly overweight tech stocks, may cause entire sectors to sink suddenly. Something similar happened last fall, when the tech sector took a battering on privacy issues and other bad PR in the social media space, although it was not particularly severe.
Another possible area of risk would be a sudden serious oil bottleneck heavily impacting per-barrel prices and roiling the energy sector. Venezuela and Iran spring to mind, with the possibility of a big bottleneck causing hiked oil prices to clash with a domestic economic slowdown. Indeed, the seeds for both long-term higher oil (and resultant inflation) and a slowing economy have already been sown; the combination of the two could spell recession.
What should I stay invested in? TSX Index stockholders looking to stay invested in defensive positions may want to hold onto stocks such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and get rid of companies that have been overspending or allowing their debts to mount. Indeed, any stock that is at low risk of insolvency and occupies a core area of the economy is a fairly safe bet, with banks, utilities, and some infrastructure assets fitting the bill.
TD Bank is fairly static in terms of share price, and is something of a bellwether for Canadian banking stocks in terms of volatility. Indeed, the TSX Index itself shows similar volatility to TD Bank’s share price, making the banker something of a de facto indicator of the performance of Canada’s biggest stock exchange.
In terms of solidity, a one-year past earnings growth of 10.6% and five-year average of 10.1% show a certain sluggish dependability, while a sufficient allowance for bad loans speaks to a sturdy balance sheet. It’s a decently priced stock, with a price-to-earnings of 12.3 and an acceptable dividend yield of 3.98% backed up with an expected 9.2% growth in earnings.
The bottom line The main issue with TD Bank as a suggestion for a stock to hold during a U.S.-led market downturn would be its exposure to that particular market, so a stock with less exposure to the U.S. might therefore suffice. Ever since the American yield curve inverted earlier in the year, the threat of a recession has been in the financial headlines; should it occur, sturdy TSX Index banking stocks may be among the safest places to hide in the long run.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.
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