Welcome to the New Dawn: Investing for the Post-Pandemic World
Delwin Graham - Jan 07, 2021
While the COVID-19 pandemic continues to claim lives and constrain economic activity in 2021, there is reason for optimism.
Good riddance to last year. In 2020, the global COVID-19 pandemic caused over 1.8 million deaths, and slowing its spread took a heavy toll on the world’s economies. The markets were extremely volatile. After starting the year with a 5% gain, the S&P 500 fell nearly 30% between February and March, and the U.S. Gross Domestic Product (GDP) dropped a remarkable 31.4% in the second quarter. Subsequent fiscal and monetary stimulus caused the GDP to rebound by over 33% in the third quarter and the S&P 500 to rally 58% between March and December. In fact, the U.S. experienced both record employment and unemployment in the same year. (Cf., Limelight Alpha Management Partners, “The Top Stocks to Buy in the New Year”, www.seekingalpha.com, January 1, 2021)
While the COVID-19 pandemic continues to claim lives and constrain economic activity in 2021, there is reason for optimism. The first doses of COVID-19 vaccines are being distributed, and life looks to be normalizing. The product shortages that we experienced in early 2020 (e.g., toilet paper, yeast) are mostly gone now, and thanks to technology, many of the challenges associated with staying and working from home have been addressed. For example, U.S. e-commerce spending increased 49% this holiday season, according to Mastercard Spending Plus, resulting in total holiday spending increasing by 3%. That spending increase is in the face of a 40% decline in retail foot traffic. (Cf., Limelight, “Top Stocks”)
If the pandemic and subsequent global lockdown of 2020 was marked by the meteoric rise of the “stay-at-home” stocks (e.g., ZOOM:NADSDAQ, SHOP:TSX, SQ:NASDAQ), then how will the projected economic recovery in 2021 be reflected in the market?
Rising Commodity Prices. Industrial metals like copper, nickel, and zinc are all up over 20% YTD, and agricultural commodities such as corn and wheat are up almost 10% YTD. The under-investment in agriculture, mining, and oil for the last decade had helped drive price increases during the global recession in 2020. We can expect commodity prices to continue to increase when demand improves after we have had mass vaccinations and global economies are fully re-opened. (Cf., Dan Niles, “Top 5 Stock Picks for 2021”, www.danniles.com, December 29, 2020)
Rising Interest Rates. Inflation has been relatively non-existent since the Global Financial Crisis in 2008-9. In fact, U.S. 10-year treasury yields have been in a bull market for nearly 40 years since peaking at 16% in 1981 and are currently at 0.9%. The treasury yield started 2020 at 1.9%, and U.S. GDP is forecast to be over 5% in 2021, which would be the best growth since 1984. It is quite possible that the treasury yield will head back towards the 2% level as global economies re-open. (Cf., Niles, “Top 5”)
Slowing of Stimulus. Economic stimulus has been incredibly important for the markets during this last decade. If we anticipate that stimulus will slow as economies get back to normal, then this should have an effect, as it has in the past. In 2011, 2015, 2018, and 2020, the stock markets fell 10%–20% over 1–5 months during periods when monetary stimulus was flat to down. (Cf., Niles, “Top 5”)
Given the projected increase in commodity prices and interest rates, and the slowing of economic stimulus, we are focusing on more value-oriented investment themes for the new year.
Investment Themes for 2021
Financial sector. This was the second-worst performing sector in the S&P in 2020 (down 5% YTD). However, the banks should benefit from a stronger economy in 2021, driving loan growth, and rising treasury yields, which improves profit margins, allows reserves to be released and enables share buybacks. (E.g., RY:TSX, JPM:NYSE)
Energy sector. The energy sector was by far the worst S&P sector in 2020 (-37% YTD). We can anticipate, however, that re-opening economies will lead to an improvement in oil demand in 2021. While there is a secular movement away from fossil fuels, this will take time. (E.g., SU:TSX, XOM:NYSE, XLE:NYSE)
Technology Sector. Unit sales have improved for the auto industry from down 48% y/y in April to down 5% in November (cf., Niles, “Top 5”). Low interest rates, low inventories, more driving, and less flying have driven auto sales. More specifically, the focus on green energy has helped drive Electric Vehicle (EV) sales, as per the addition of Tesla to the S&P 500. But EV industry shipments are only 3% of the total vehicles sold, and there is lots of room for growth. (E.g., CARS:TSX; DRIV:NYSE)
Online sports betting is developing as the next massive internet market, driven by state legislation following the U.S. Supreme Court legalization of online sports betting in May of 2018. The total global gambling market is roughly US$450B and growing approximately 10% per year (cf., Niles, “Top 5”). Only 12% of that market is online – there is room to grow. (E.g., DKNG:NASDAQ)
Medical Devices. As the COVID-19 vaccinations take effect, we can expect that the pressure on hospitals will abate and elective surgeries will be rescheduled, including knee and hip replacements. (E.g., SYK:NYSE; ISRG:NASDAQ)
Of course, many discounted stocks will recover to their post-pandemic valuations and beyond. But some will not. Please contact me at email@example.com or 780-408-1518 for a few ideas.