Is the Market Volatility Good or Bad for Marijuana Stocks?

Marijuana Stocks in Today’s Market

By now, you’ve no doubt heard about the big run on GameStop Corp. (NYSE:GME). Even people who are only tangentially aware of the stock market have taken note of the massive groundswell of support for a retail company that most analysts had largely confined to the dustbin of history.

Millions of words have already been spent dissecting that story, so I won’t add to the deluge here. What I will do, however, is tell you what the related market volatility means for pot stocks. What’s more, I’ll explain how marijuana investors can best profit from that volatility.

Without getting into too many details, GameStop stock recently rose and fell exponentially in a matter of days. What that means for marijuana investors is that volatility in the stock market is at an all-time high, and many people have been questioning just how stable the market was in the first place. (Source: “The GameStop Craziness Pulls Back the Curtain on the Stock Market,” The American Prospect, January 28, 2021.)

As such, we may see investors pull back into safer investments and eschew riskier ones like marijuana stocks. After all, weed stocks are famous for their volatility; that’s part of their appeal.

When investing in emerging industries, you have the opportunity to net huge gains as stocks are driven high on hype and potential future earnings. Everyone’s looking to get in on the ground floor, and the window of opportunity to get in on the ground floor of pot stocks—especially U.S. pot stocks—will eventually close.

On the flip side, there’s always the nagging concern that emerging-industry stocks could be overhyped. They could end up becoming overvalued, which, in turn, would lead to a market correction. This is something that investors who’ve gone long on marijuana stocks know all too well.

But people who’ve invested long-term in pot stocks know that they almost always recover, usually with massive gains in short periods.

So, with the market context set, let’s dive into what we can expect from weed stocks moving forward.

The Future of Pot Stocks

When it comes to marijuana stocks right now, the market is presenting us with two likely scenarios.

As discussed earlier, the market volatility caused by the recent GameStop shenanigans will give many analysts pause and force them to reconsider whether the stock market is overheated.

Remember that the U.S. Federal Reserve pumped tons of cash into the economy at the beginning of the COVID-19 pandemic in order to offset the market turmoil at the time.

Whether you agree with the Fed’s move, it not only helped prop up the stock market but, in many cases, drove sky-high gains, particularly from tech stocks.

This has led some analysts to claim that we’re in a Fed-manufactured market bubble. What’s more, with borrowing rates low at the moment, cash is continuously flooding markets, which is great for stockholders but presents a problem should that cash-spout ever get turned off.

So the first likely scenario is the current market bubble (if it exists) bursting, leaving pot stocks in a tough position as investors retreat to safe-haven assets and commodities.

But even in that scenario, there’s an opportunity to make huge gains by buying low.

One thing that long-time marijuana stock investors have seen is that weed stocks are famously resilient. They get knocked down, but they do, indeed, get up again—and again and again, almost always rising higher than before.

Charts courtesy of StockCharts.com

The above pot stock chart illustrates my point: there are both highs and lows, with steady climbs upward.

While we may see another reset and correction, what’s almost certain is that marijuana stocks will climb again, attaining new highs.

So whether you’re looking for a long-term buy-and-hold stock or want to net huge gains in the short term, a correction offers investors of both ilks big opportunities.

The second likely scenario is that we’ll see the opposite happen.

Investors, especially retail investors, are emboldened by the GME stock bonanza. As such, they’ll search out other viable stocks that suit their interests. And, much like GameStop stock, pot stocks offer a tangible product that many retail investors are familiar with.

Which is to say it’s far more likely that retail investors will jump into something like marijuana stocks as opposed to, say, shares of a company that deals with e-commerce payment processing or something else that’s a little more disconnected and esoteric.

In the second scenario, we could easily see weed stocks climb higher than ever. We’re talking potentially hundreds of points of gains in a matter of days.

While the first scenario is the more likely of the two, that doesn’t mean the second scenario isn’t possible. And here’s the best part: in either of the two situations, long-term investors of marijuana stocks will probably be just fine.

Whether they see huge spikes in value in the coming months or have to wait a little while longer, ultimately, pot stocks are in a very favorable place, especially as the U.S. edges closer to federal legalization of cannabis.

Analyst Take

No matter what happens with the stock market moving forward, it appears that marijuana stocks are in a strong position.

Whether weed stocks are set for another boom-bust cycle that’s likely to reward long-term investors and day traders alike—or a huge run by retail investors—pot stock investors can be confident in the marijuana market.