Whenever emerging industries and new economic sectors make their way into Wall Street, many investors pay close attention to trading opportunities created by initial enthusiasm.
But smart traders know that a better strategy consists of waiting for new stocks to mature and star correlating with established benchmarks such as the Dow Jones Industrial Average.
In the case of the cannabis sector, this correlation is already in place; legalization and regulation actions in the United States and Canada continue to make progress, and there is a nice diversity of publicly traded companies operating within this nascent industry.
When evaluating the performance of cannabis IPOs, one does not get the sense of the excitement reserved for technology IPOs, particularly social networks that may or not become “the next Facebook.”
Although this is an edgy industry that revolves around a product still considered to be a controlled substance in some jurisdictions, the marijuana sector has managed to escape the excessive hype associated with tech IPOs.
The sector has already enjoyed a heyday, which ran from just before the 2017 holiday season until October 2018, whereby the U.S. Marijuana Index climbed 158%.
In 2019, the DJIA weathered strong geopolitical challenges as well as fears of an economic recession.
For the most part, DJIA investors shrugged off the complexities of the war in Syria, a conflict that has become utterly confusing, as well as signals sent by the Federal Reserve with regard to economic expansion.
There is also the issue of political uncertainty at the White House, but despite all these factors, the DJIA has delivered a strong performance.
For cannabis IPOs, however, 2019 has been a challenging year even with the national legalization of marijuana in Canada.
Investor disappointment in marijuana stocks has been felt strongly in 2019. The financial backing of Wall Street giants that run in the tobacco and alcoholic beverage industries has failed to prevent the downturn of the U.S. Marijuana Index.
One of the problems faced by companies in this sector is that the regulatory environment is still not as favorable as they need it to be able to thrive.
The SAFE Banking Act is supposed to make it easier for marijuana enterprises to manage their finances through commercial banks, but there are doubts about this law being passed by a Senate that is still under Republican control.
The truth about major players in the cannabis sector is that they have burned through cash as they wait for a more favorable regulatory environment.
Earnings reports have failed to assuage investor concerns, and market realities such as underground sales picking up in California because of high retail prices have also contributed to investor apathy.
Why 2020 Could be Different for Cannabis Stocks
The reason investors have been bullish on the DJIA and bearish on cannabis stocks boils down to fundamentals.
Similar to IPOs in other sectors, young cannabis stocks were oversold and later failed to impress major shareholders with positive financial reports.
When this happens in any sector, investors tend to flock to blue-chip stocks and major benchmarks such as the DJIA and the S&P 500.
As long as sector leaders continue to issue lackluster earnings reports, major investors will continue to stay away from cannabis stocks, especially if the regulatory climate is not as warm as desired.
Scandalous headlines about companies destroying marijuana reserves because their product line was not received with enthusiasm will also keep investors away.
There is a silver lining in all this, however, and it may be revealed next year. Spending on legal cannabis markets, whether they are medical or retail, is widely expected to jump from $18 billion in 2019 to $23 billion the following year.
Voters in various states are pushing their legislatures to legalize cannabis just like California and Colorado have done. The market for affordable consumer goods such as CBD oil dispensers and hemp accessories is still in its early stages.
The microeconomics forecasts for this sector look good, but what about Wall Street in general?
History shows that financial exchanges are highly cyclical, and what this means for the DJIA is that its amazing bull run in recent years could be coming to an end.
Should this happen in 2020, and there are various reasons to believe that it will, investors will likely jump off the bandwagon and start looking for opportunities where the forecasts are sunnier.
In the case of cannabis stocks, projections are positive, and the companies need to take advantage of demand by getting their financials in order first.
The current correlation between the DJIA and cannabis stocks could very well be reversed next year; as previously mentioned, dark clouds could be on the horizon for the American economy, but this should not impact marijuana demand too much.