It has been a rough few days for pot stocks like Canopy Growth (NASDAQ:CGC), Tilray (NASDAQ:TLRY), Aphria (NASDAQ:APHA) and Sundial Growers (NASDAQ:SNDL). However, a reversal in the major indices has helped things turn around. SNDL stock and its peers are still in the red, but they have trimmed their losses. But what caused the dip in pot stocks to begin with?
Although the seas have not always been smooth for cannabis companies, nothing sector-specific seems to be at play. Instead, pot firms are just particularly suffering as the market dips. Why is that?
Well, cannabis stocks are speculative in the sense that investors are betting on more widespread legalization. The election of President Joe Biden and a Democrat-controlled Congress both support that thesis. However, nothing is guaranteed. This means that a huge reason investors pile into pot stocks is in hope of legislative action that is yet to come. When the going gets tough in the stock market, those speculative trades lose their shine.
We are seeing that this week. SNDL stock was down as much as 15% today along with the broader market. Concerns over inflation, rising yields on the 10-year U.S. Treasury note and Covid-19 reopening uncertainty have been weighing on stocks. Risk sentiment may be changing, and cannabis stocks are some of the losers.
At the time of the writing, CGC stock was down just slightly. APHA, TLRY and SNDL stock were posting worse losses.
But what does the future have in store?
Why Are Pot Stocks Down? And Where Are They Headed?
For cannabis bulls, there is reason for optimism. As I mentioned above, the sector has long been a bet on more widespread legalization, particularly in the United States. Biden and other Democratic lawmakers are more likely to see federal legalization through. Plus, a handful of states continue to move forward with legalizing and decriminalizing recreational cannabis use.
We saw one big catalyst in the space earlier this week with a move by Virginia lawmakers. The state became the first in the southern U.S. to hop on board the pot train… and it sparked hope for bulls. Essentially, it shows that the political pendulum is swinging in favor of cannabis.
With inflation concerns high, things might be a bit rough for pot stocks. However, nothing has yet shaken the long-term bull thesis.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.