The 411 on 420

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Market Trends

The origin of 420 – pot culture’s most celebrated of days – is a story ripe for cinema.

It began in the 1970s at San Rafael High School in California.

Five friends, dubbed “the Waldos,” embarked on a Goonies-like treasure hunt (complete with a map).

They set off on their adventure once a week at 4:20 p.m., after football practice.

In the halls, they’d remind each other with the phrase “420.”

But instead of searching for One-Eyed Willy’s treasure ship like the Goon Dock teens did, the Waldos were on the hunt for a legendary abandoned cannabis crop planted by a Coast Guard member.

Unlike the Goonies, the Waldos never found this mythical source of weed.

But 420 became a code word for smoking pot.

It ignited a movement.

One of the Waldos’ older brothers was good friends with Grateful Dead bassist Phil Lesh, and his father also managed real estate for the band. This gave them rare access to the counterculture icons.

The Waldos used their 420 term backstage. And it eventually caught on.

By the 1990s, it had taken on a life of its own.

In 1994’s cult classic Pulp Fiction, all the clocks in the movie are set to 4:20.

In 2003, California voters approved medical marijuana legislation SB 420… a very purposeful bill number.

Today, 420 is celebrated around the world. It’s part holiday, part act of civil disobedience.

Pot smokers gather in crowds and light up, the idea being that “the cops can’t arrest us all.” And on the National Mall in Washington, D.C., it’s an annual event… though it’s not illegal in the nation’s capital anymore.

At the moment, 29 states allow medical cannabis use. There are also nine states – Alaska, California, Colorado, Nevada, Massachusetts, Maine, Oregon, Vermont and Washington, as well as the District of Columbia – that allow recreational use.

Click to enlarge

But weed is still classified as a Schedule I drug (meaning it has a high potential for being abused) at the federal level in the U.S… which has been the thorn in the side of pot stock investors.

Despite that, marijuana stocks blazed to new heights at the start of 2018.

California – the sixth-largest economy in the world, the most populous state in the U.S. and the origin of the 420 movement – began recreational pot sales.

The marijuana market in California alone is expected to rise to $3.7 billion this year, then surge to more than $5 billion next year. That would make California’s legal weed market larger than the state’s beer market.

But weed stocks tumbled after U.S. Attorney General Jeff Sessions rescinded Obama-era memos that promised the federal government wouldn’t interfere in marijuana-friendly states.

This triggered a downward spiral.

The U.S. Marijuana Index fell 32.7% this year from its peak in January to the start of April…

Those were dark days for weed investors.

But then, just a few days ago, the White House endorsed states’ rights on the regulation of marijuana, thereby lifting the looming shadow of Sessions’ decision.

In turn, pot stocks have blazed higher, gaining 31% in a handful of days… just in time for “the holidays.”

As investors, you must recognize the importance of 420.

We’ve started to see a trend emerge over the last several years, which is similar to what we’ve experienced already in 2018.

Let me show you…

In 2015, the U.S. Marijuana Index hit its high for the year of 81.10 on April 23 – right after 420. It then tumbled 64% to close out the year.

In 2016, after a difficult first quarter, April brought new life. And by April 18, U.S. pot stocks hit a new high and had surged 84.6% since the start of the year. They then cratered 33.8% through August 28.

In 2017, the U.S. Marijuana Index once again struggled during the first three months of the year. Pot stocks slipped 14% from January 1 to March 15. There was a slight bump in April, but not even 420 could salvage the shift in momentum.

By October 26, the index was down 40%. And that was despite the fact that recreational weed sales launched in Nevada in July 2017.

But just as we saw in 2016, pot stocks rocketed higher in 2017 to finish the year.

Both of those big run-ups were essentially fueled by California legalization. In November 2016, voters went to the ballots and approved recreational sales. In the final quarter of 2017, it was the buildup in anticipation of that recreational market finally going live.

What we’ve seen so far in 2018 is quite similar to the trend from the previous three years.

April 20 has historically provided us a near-term high. Afterward, just as the broader markets experience, pot stocks seem to settle into a summer lull.

We’ll see if that trend continues.

Because just as in the broader markets, politics, not company performance, is driving sentiment.

This summer, there’s a lot to keep an eye on with the recreational markets in Canada, Massachusetts and Vermont. And medical marijuana sales in Arkansas could be on deck in the later part of the year.

Maybe the origins of 420 are real. Maybe it’s hazy fantasy. It really doesn’t matter.

What does matter is that as each 420 comes and goes, the outlook for the legal weed market gets more and more bullish. And I believe that even if we see another summer lull, the marijuana market will end 2018 a big winner!

Good investing,

Matthew