Why now could be the time to get ready for a stock market crash
The stock market is processing the news that Donald Trump is going to be the next President of the USA. And the immediate response was very different across various sectors.
Financials, industrials, and energy shares climbed, while utilities, consumer staples, and property fell. Thereâs a clear theme here â and I think thereâs a real opportunity.
Economic growth
In short, the stocks that have done well are the ones that are involved in US economic growth. Banks finance it, energy powers it, and industrials make it happen.
Norfolk Southern is a good example. As one of the six major US freight railroads, it stands to benefit from the need to transport materials and goods across the Eastern half of the country.
The stock climbed almost 10% following the election result, taking it to a 52-week high. Thatâs a clear sign investors think the election result is going to boost the industrial economy.
They may be right. But expectations are a lot higher now than they were before and that means thereâs a much greater potential risk if things donât turn out as anticipated.
Defensives
Not every company benefits from economic growth in the same way though. As GDP expands and contracts, demand for food, electricity, and real estate doesnât change much.
These are the stocks that fared the worst. Shares in Colgate-Palmolive fell over 4%, mostly because its growth prospects arenât particularly impressive in a growing economy.
In general, such shares that hold up best in a stock market crash. They’re typically resilient, meaning investors can look to them for stability when things go wrong.
When share prices start falling, itâs usually too late to buy these stocks. The time to be looking at them is when theyâre out of fashion â and I think thatâs now.
A potential buying opportunity
One stock that stands out to me right now is NextEra Energy (NYSE:NEE). The company is a regulated utilities business that’s the largest generator of renewable energy in the US.
The market sees this as a bad combination right now and it’s easy to see why. The companyâs modest growth prospects and Trumpâs focus on oil and gas over wind and solar are both risks.
From a long-term perspective though, I think things look very positive. If renewable energy is part of the long-term outlook for US energy, then NextEra is in a strong position.
NextEra Energy P/E Ratio & Dividend Yield 2015-24
Created at TradingView
The firm owns some of the best sites for wind and solar generation. And after falling 5%, the stock trades at an unusually low price-to-earnings (P/E) multiple with a 3% dividend yield.
Will the market crash?
Iâve no doubt the stock market is going to crash⦠at some point. What I donât know however, is exactly when that will be.Â
As an investor, Iâd like to own stocks that will be resilient when share prices fall. But I want to buy them only when their valuations are attractive.
I think the US election result might be a chance to do this. And NextEra Energy is just one of the stocks that Iâm going to be looking at very carefully over the next few days.
The post Why now could be the time to get ready for a stock market crash appeared first on The Motley Fool UK.
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More reading
- Just released: the 3 best growth-focused stocks to consider buying in November [PREMIUM PICKS]
- A UK share and an ETF that could soar following Trump’s election win
- 2 FTSE stocks that demonstrate the best (and worst) of the AIM market
- With a P/E ratio of 8 and selling for pennies, is this FTSE 250 share a bargain?
- Could the stock market crash in 2025?
Stephen Wright has positions in Norfolk Southern. The Motley Fool UK has recommended NextEra Energy. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
