Why Cannabis’ Recent Downturn Is Nothing to Worry About

Here’s the deal. We saw a bit of downside volatility in the NICI 50 index and in overall cannabis stocks last week.

It was the first real downdraft since the cannabis market turned up with the overall equity market in late December of 2018.

Whenever these downturns occur, I get a lot of questions from worried investors wondering what their next move should be and if things will turn back around.

In this case, the answer is simple: Cannabis is doing just fine, the overall market is driving cannabis stocks lower, and although I don’t know exactly when things will turn, I know for a fact that they will.

This may not be the most satisfying answer, but it’s the truth.

Let me explain just what I mean and why you shouldn’t worry…

With Volatility Hitting Every Stock, It Was Naturally Cannabis’ Turn

When the cannabis market went down in November and December, it turned out that the stocks were selling off in the context of a worldwide rout of riskier assets.

Tech stocks got crushed, emerging markets’ stocks were down, and even blue-chip stocks got hit. It was only natural that cannabis stocks would have their turn in the punishment room.

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Cannabis industry bellwether Canopy Growth Corp. (NYSE: CGC, TSX: WEED) declined by 34.6% between the Oct. 23 launch of Cannabis Profits Daily and Christmas, which marked the low point for most cannabis stocks. That’s a big decline. But Apple Inc. (NASDAQ: AAPL) was down by almost the same amount – 34.1%.

And there was a reason Apple was down. It turns out that there is the possibility of a recession in China, so Chinese consumers haven’t been scooping up as many iPhones as people thought they would. There is also the possibility that trade tensions between China and the United States could increase Apple’s costs down the road.

So why was Canopy down? Canopy was down because all stocks were down, and all stocks were down partly because of the possibility of a recession in China. If that makes no sense to you at all, it’s a good thing. It’s nonsensical. But that’s just the way stock markets trade these days.

A Reality Check in Our Favor

But as I’ve said, eventually reality moves the stock market, not the other way around.

People finally realized that Canopy Growth was a Canadian cannabis company. No one in China will ever choose to buy or not to buy their products. So Canopy and other cannabis stocks recovered and then added more to their prior high levels.

Canopy is back. Apple only came back a little, because there are still those Chinese consumers out there who might not buy an iPhone this quarter.

So, what about this time around? What sent the NICI 50 index down nearly 5% in two days last week?

The exact same thing. The world is getting a little nervous about its big, global stocks. A slowdown in China, zero growth in Europe, trade tensions, Brexit, central bank doings – all of these events have investors jittery. And since cannabis is considered among the riskiest asset classes, some of the first and strongest sell signals show up in that sector.

The Media’s Pointing Fingers in the Wrong Direction

Now, I will say that there’s certainly one thing that did NOT cause the sector to go down.

You may have come across news articles blaming the declines on Aphria Inc. (NYSE: APHA) rebuffing Green Growth Brands Inc.‘s (CSE: GGB, OTC: GGBXF) hostile takeover offer or on the news that New York City‘s restaurant regulator is cracking down on CBD. I’ll have more to share on that restaurant story soon, but it was not the reason stocks went down.

Whenever stocks decline, financial journalists scramble to find the reason why – and most often they get it wrong.

This time, though, reality seems to be catching up more quickly. As I write this, stocks are down 0.6%, the NICI 50 index is basically flat, and the stocks in our model portfolios are doing better than that – most are up for the day.

No one can guarantee that will continue, of course – and you shouldn’t listen to those who claim they can. But my message to you is that this kind of short-term volatility is normal, particularly after a period of big gains like we saw in January.

It’s nothing to worry about, and it’s certainly not a signal that it’s time to sell anything! In fact, you might use any price backup to add to some cannabis positions you especially like.

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