What the Market Volatility Means for Marijuana Stocks

Marijuana Stocks as Long-Term Investments

Once again, there’s uncertainty in the market. With the COVID-19 Delta variant beginning to frighten investors, we’re seeing some renewed panic in the market. But what does that concern mean for marijuana stocks?

Well, if we look to the past, this could potentially be bad news for pot stocks.

That’s because, just like at the outset of the pandemic, we saw volatile industries—like marijuana—become the first to see huge investor flights.

To an extent, that’s a perfectly reasonable response. After all, stocks that are volatile in normal market conditions are even more likely to see rapid fluctuations and rapid declines in times of economic worry.

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Investors are more than happy to incur higher risk in their portfolios when economic outlooks are positive. But with COVID-19 putting the global supply chain in a stranglehold, investors naturally began to worry. They wanted to find safe investments that would be able to weather the storm.

This drove investors away from volatile markets—especially the marijuana market, considering it’s one of the more unstable ones. This move away from pot stocks sent share prices tanking during the first stages of the pandemic.

Now that we’re once again concerned about a pandemic resurgence, are pot stocks likely to tank again? Are we doomed to repeat the past if the pandemic once again induces economic slowdowns? Well, it’s hard to say.

Yes, history shows us evidence that marijuana stocks will fall. However, this is a very different time.

In the early days of the pandemic, people were understandably panicking. No one had any idea of how bad it was really going to get. I mean, I even wrote about how I thought this would all blow over and we’d be back to normal in a few months. (There’s a reason I write about stocks and not virology).

This panic caused massive market overreactions, especially regarding marijuana stocks. We saw share prices fall more than they should have. And that later led to a fairly strong recovery during the market correction that began in late 2020. People realized that, yes, things were bad, but it wasn’t the end of the world.

Pot stocks largely began to climb back. While many haven’t regained their 2019 heights (and there are more reasons for that than just COVID), others have rallied back stronger.

Chart courtesy of StockCharts.com

So now, with the gift of hindsight, we know that, even if markets stall for a bit, there’s a good chance that they’ll be able to regain their momentum before long.

With that knowledge, investors may be more willing to wait out another downturn, or at least not be as concerned and flee as quickly to safe-haven markets.

Either way, it’s not a great sign that we’re seeing uncertainty in the market again surrounding the potential of the pandemic worsening.

Now, I acknowledge that my track record isn’t perfect in this regard. However, with vaccination rates high in many developed economies, I don’t believe that things will be as bad as they were the first time around (fingers crossed).

But even if we get to the worst-case scenario and things are as bad as they were in early 2020, does that mean that marijuana stocks are no longer a good opportunity?

Quite the opposite.

Even in the worst-case scenario, marijuana stocks will actually become better opportunities. That’s because there are usually over-corrections that send share prices further down than is warranted, which has always been the case in the marijuana market.

These drops have always been followed by strong rallies. This gives investors the chance to hold shares long-term until the correction subsides, which is an opportune moment to reinvest in pot stocks.

This buying on the dip can bring massive gains down the line. And more often than not, investors don’t even need to wait that long. Rallies typically occur within a few months after the drops (although sometimes the drops can last longer).

So, investors can follow the instructions of the age-old adage of buying low and selling high.

And this takes us to an even more important point. The marijuana stock market, while it does offer day traders a bevy of opportunities to see short-term gains, is really more suited for buy-and-hold investors.

That’s because the week-to-week and month-to-month performance of the top marijuana stocks is hard to predict. However, the market’s trajectory is really only going one way in the long term: up.

More markets will open, legalization will become more widespread, companies will develop more efficient production methods, and the black markets will diminish. In other words, time is on the side of marijuana stocks.

So whether investors buy at the zenith or the nadir in 2021, the simple fact is that the top marijuana stocks have not yet reached their peak.

Far from it, in fact.

Again, day traders can make money on pot stocks, but the issue is trying to time the market just right. And when you have something like COVID-19 still stubbornly hanging around, trying to time the day-to-day fluctuations correctly becomes all the more difficult.

Instead, investors are better off investing in a still-nascent industry that is nowhere near to fully saturating the market and reaping the benefits that are all but certain to come.

Analyst Take

While the market’s volatility right now is due to COVID-19’s uncertain situation, marijuana stocks may be in for a bumpy ride.

But my long-time readers know that market volatility is an issue that the marijuana industry has experienced before. And each time, the industry has come out stronger on the other side.

Granted, a global pandemic is certainly unique, but that doesn’t change the reason I’m so bullish on pot stocks. Marijuana is a globally in-demand product that is legally available in only a few countries (for now). Once that situation is rectified, we’ll most likely see gains across the board.