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Marijuana is finally fully legal in Canada! And the stock market reaction was...a buzzkill

The day we have all been waiting for is finally here. Canada has fully legalized all types of marijuana use (medical and recreational) as of Wednesday, October 17. This makes Canada only the second country in history to fully legalize adult use of recreational behind Uruguay, and it is an exciting time for marijuana companies and consumers globally.

Investors might have expected the stock market to get higher on this iconic day for marijuana history just like the celebratory marijuana smokers did throughout Canada. New recreational marijuana dispensaries opened their doors throughout the country, mass gatherings of stoners congregated to celebrate the legalization, and online marijuana marketplaces crashed from excessive website traffic to buy cannabis.

Unfortunately for marijuana company stockholders, the stock market reactions were instead more of an anticlimactic buzzkill. Marijuana stocks opened down from Tuesday’s close, fell sharply in the early trading hours, and then slowly made a comeback as the day progressed. The Canadian Index fell -2.78 percent, the United States Index fell -0.72 percent and the overall North America Index closed down -2.00 percent Wednesday.

Canada Index Values October 16, 2018 End-of-Day-October 17, 2018 Close

Source: Marijuana Index

United States Index Values October 16, 2018 End-of-Day-October 17, 2018 Close

Source: Marijuana Index

Marijuana ETFs also down Wednesday amid Canadian legalization

Looking at the largest marijuana ETF price changes can also provide insight into how the overall market is performing. The largest ETFs also closed down Wednesday despite the legalization. ETFMG Alternative Harvest ETF (NYSEArca:MJ), which is designed to track global marijuana firms, closed down -2.91 percent. Another ETF which seeks to replicate the returns of the North American Medical Marijuana Index and is the largest ETF offered on the market now, Horizons Marijuana Life Sciences Index ETF (TSX:HMLSF), closed down -2.10 percent. However, from market open to close on Wednesday, MJ and HMMJ did close up 2.7 percent and 1.5 percent, respectively.

Investors should not be too discouraged by the disappointing trading day for the overall marijuana industry. Year-to-date returns are still strong for these ETFs at 11.64 percent for MJ and 17.08 percent for HMMJ. Much of that growth has been driven up by the anticipation of Canadian legalization, so the regulatory shift has not gone in vain.

MJ and HMMJ Return October 17, 2018 Trading Day

Source: Yahoo! Finance

Legalization does not guarantee a stress-free environment for marijuana businesses and consumers

While some businesses are thriving Wednesday from the legalization, it is not high times for everyone. Legalization has led to shortages throughout Canada for both marijuana product and retail locations to provide it. While many new storefronts emerged Wednesday to sell cannabis, other retail businesses could also not open up in time for legalization day. Novia Scotia and Manitoba officials, for example, have said they likely won't have a large selection on the first day.

Executives from the largest cannabis industry players are also expressing concerns about shortages. CEO of Canopy Growth Corporation (TSX:WEED) (NASDAQ:CGC), Bruce Linton, confirmed in interviews that "there will be shortages” due to “pent-up demand for nine decades of prohibition” upon legalization. Additionally, Aphria Inc (TSX:APH) warned investors that it would not have enough supply to meet consumer demands by Wednesday. While Canopy closed Wednesday down -4.38 percent, Aphria was one of the only large cannabis companies to close up Wednesday, yielding a 3.38 percent gain.

What could be slowing Wednesday’s stock market growth is that it remains illegal under United States federal laws and investors are hesitant to dive into the industry given the regulatory risks fully. The Canadian government travel advisory website was updated Wednesday to account for the updated regulations, and they are demanding marijuana buyers and consumers legally possessing or consuming on the now-legal Canadian side to “not attempt to cross the Canada-U.S. border with any amount of cannabis in any form, even if you are traveling to a U.S. state that has legalized possession of cannabis.” Investors might still be concerned about the riskiness of the national legalization experiment and are waiting to see how things unfold as the smoke dissipates.

Industry leaders remain optimistic about the opportunities that legalization will present in the marijuana space

Brendan Kennedy, CEO of the most talked about marijuana company Tilray  Inc (NASDAQ:TLRY), said in a CNBC interview Wednesday that the legalization is “a global opportunity and we think we have a first-mover advantage.” He mentioned in another Wednesday CNBC interview with Jim Cramer that there would likely be a third country to implement full legalization within the next year. If that country is the United States, that could lift much of the legal tension on the border and make Canada and the U.S. a very strong joint venture in the North American marijuana space. Tilray was amongst the loser Wednesday, closing down -6.40 percent.

Aurora Cannabis Inc. (TSX:ACB) (OTCQB:ACBFF) representatives are also excited about the moral and business opportunities that the legalization will present in Canada. They applauded the Canadian government’s progressive move to fully legalize marijuana because, as said by Jonathan Zaid, Aurora's Director of Advocacy and Corporate Social Responsibility, it “will create meaningful change for the 500,000 Canadians who deal every day with the effects of simple possession charges.” Aurora was amongst the losers Wednesday, closing down -3.42 percent.

Product shortages might mean opportunity for marijuana companies that can keep up with demand

Another consideration regarding the aforementioned product shortages is that it could provide opportunities for companies that can provide enough supply to consumers. While shortages are evidence of an economic imbalance and can lead to major opportunity costs for companies and therefore stock market investors in those companies, businesses that can meet demand can become more profitable in the industry. They will be able to steal more market share from those that cannot keep pace.

If investors can choose the individual stocks that will make it through these volatile and uncertain times, their portfolios will surely flourish. This could mean sticking to buying the largest industry players, or an emerging company with major growth opportunities. Time will tell how this legalization will impact future market growth.

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