Coronavirus (COVID-19) is becoming a serious problem for the global economy and global stocks.
As the mysterious virus rages across the planet, global stocks are taking a beating.
The Chinese economy is grinding to a halt. Oxford Economics, a global economic research firm, recently predicted that coronavirus could reduce global growth by 1.3%, equal to $1.1 trillion in lost income.
These lower growth projections have been hitting global and US stocks hard.
The NASDAQ 100 is down about 8% in the last 3 days.
The S&P 500 is down 7% in the last 3 days.
Take a look at the sharp drop in the 3-month chart of the S&P 500. The leading index surrendered three months of gains in three days.
Weakness in the broader stock market is also taking a bite out of cannabis stocks.
The Alternative Harvest ETF (MJ) is down 12% in the last three days.
Looking forward, if coronavirus continues to spread, it’s not crazy to think it could cause a recession in the US and other countries.
That has many investors asking an important question.
How Would the Cannabis Industry and Cannabis Stocks Perform in a US or Global Recession?
The cannabis industry is brand new, so we don’t have a lot of historical data to review.
However, when I look at other sectors with similar traits to cannabis, it might just be a great place for investors to seek shelter during a recession.
Tobacco and Alcohol Industries are Usually Recession Proof
What we see from historical data is that some sectors of the US economy are more impacted than others by a recession.
Industries that rely on high levels of discretionary spending tend to struggle in a recession because consumers spend less money on things they don’t really need such as a new TV or a boat.
At the same time, consumers continue to spend freely on things they can’t live without such as toothpaste and medicine.
This dynamic was on display most recently during the great recession of 2008. Some industries saw sales plummet, while others actually saw sales grow. This is what leading market-research firm Euro-monitor found in a study on the great recession.
Below you can see how different industries performed in the great recession of 2008.
Source: Euromonitor International (Passport Industries)
(Note: Industry dynamics during the 2008/2009 downturn. Total category growth among 38 developed markets during 2008/2009. The size of the bubble represents the intensity of the effect within each sector. The larger the bubble, the further away the category growth rate is from the start of each sector growth bands.)
As you can see, alcohol and tobacco sales didn’t fall during the great recession of 2008. In fact, they actually continued to increase. Consumers smoked and drank more because they were depressed about weakness in the global economy.
This is important for cannabis investors because the cannabis industry has something in common with big tobacco and big alcohol.
Cannabis customers are extremely loyal and even if the economy and consumer spending slow, its unlikely consumers will cut back on cannabis consumption.
This tells me that cannabis sales should continue to thrive during a recession.
This is good news for investors. Because the cannabis industry is expected to see huge growth in 2020.
US Cannabis Sales Projected to Grow 14% Annually for Next Five Years
Experts predict big gains for the cannabis industry in 2020.
The Illinois cannabis market is on fire, and 11 more states could be voting to legalize medical or recreational cannabis.
Market-research company Statista is predicting 14% annual sales growth for the next five years.
The Big Picture on Coronavirus and the Cannabis Industry
The coronavirus is impacting global economic growth and that has been hitting the broader stock market and cannabis stocks in the last few days.
However, history tells me that the cannabis industry and cannabis sales should hold up well during a recession. Share prices could still fall in a recession, but resilient sales growth during a recession tells me that shares would be quick to recover from a downturn.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.