Stocks rose on Thursday to end a holiday shortened week after a surprisingly good June employment report. As states have reopened their economies, over 5 million Americans have returned to work over the past two months. That doesn’t count businesses that reopened since mid-June. Thus, further gains are likely in July. But there are still over 14 million Americans out of work. Businesses are not likely to rehire everyone laid off or furloughed during the pandemic. Some businesses may not reopen at all. Thus, after next month, the pace of job recovery might slow.
With that said, we are witnessing in real time many of the positive aspects of a free and open society, even in times when public health decisions put restrictions on our daily lives. We adapt. Businesses adapt as well, often at remarkable speeds. When prognosticators look forward, they often fail to understand that a capitalist society reacts extraordinarily quickly because the profit motive rewards those that adapt the quickest.
Look at restaurants. Drive-thrus have been open throughout the pandemic. Restaurants with drive-thrus saw business decline initially but the best recovered. Drive-thrus were the only game in town for a while. The better chains invested to speed up the process of moving patrons through faster. Cutting off 15 or 20 seconds per patron may not sound like a lot, but it is enormous. Many restaurants without drive-thrus closed. But others ramped up take-out using the Internet to market services. They partnered with delivery companies. They revamped menus to focus on food that withstood the time delay associated with delivery. They packaged meals in containers suitable for reheating, often including instructions. They may not have retained 100% of Pre-Covid volumes, but they kept customers and added new ones. A few got so successful that today, take-out volumes exceed sales before the pandemic began.
Many big box retailers had begun to realize the advantage of buying online and then picking up the order at the store. That advantage escalated during the pandemic. Ratios of online to instore sales rose dramatically. Business with little or no online presence got left behind. The examples I just gave are fairly obvious to anyone observant. Rules about what could be open and what could not forced other changes. For instance, in many states, auto repair was an essential service, but auto sales were not. Auto dealers began to sell or lease more and more vehicles online, either delivering them to the buyer’s homes or having them picked up at the service department.
With offices shut down and workers working remotely, the advantages of cloud computing escalated. With movie theatres closed, more films went directly online, often utilizing pay-per-view, sometimes with remarkable success. Of course, not every new venture succeeded, but many did.
I have noted before that pandemics accelerate change. We will get a vaccine earlier than many originally predicted, for instance. But there is a downside to change as well. I doubt the movie theatre industry will fully recover.
A lot has been made lately of the fact that the six largest companies now account for about a quarter of total stock market cap. Maybe some of that is momentum driven or speculative buying. But think about the business outlook for names like Apple#, Microsoft#, and Amazon. The pandemic has accelerated change in their favor, even with many Apple stores still closed. By definition, if the strongest companies are now comprising a greater percentage of total market cap, the weakest lose share. You see that if you look within each of the S&P 500’s eleven vertical sectors. On the surface, one might think that consumer discretionary is a sector that would be full of problems with the country in virtual lockdown for two months. But over a third of the market value of this sector is accounted for by Amazon and Home Depot. Macy’s? It almost doesn’t matter to the overall market whether Macy’s survives or not. Even General Motors, once the largest company in this sector, makes very little difference. If you like the REITs and wonder what happened with all the malls and office buildings dormant in Q2, it might surprise you to know that REITs did quite well in the quarter, but not for reasons you might expect. 40% of the REIT market cap is now accounted for by companies that operate towers that support the antennae that service the wireless and microwave industries. And the next biggest component are the data center companies. In the tech sector, Apple and Microsoft account for over 40% of that sector’s market value.
Thus, when you see stocks rising and can’t figure out why, two factors stand out. First, pandemic and change present opportunity. Good companies pounce on that opportunity and gain share. Second, while the stock market is a reflection on the whole economy, its direction is dictated by the success or failure of the largest and most successful companies. There are times even they suffer. But usually those occasions are brief, and recovery is rapid. Obviously, in today’s world, almost every success story has a technology component. McDonald’s isn’t moving patrons through the drive-thru faster on will power, its success is driven by small technological increments.
Of course, stocks can and often do get overvalued. Valuation always matters. But in horse racing bettors don’t make a dime betting on a horse that comes in fourth. You have to be on the right horse to make money. Airlines, cruise ships, and hotels won’t disappear. We will still have movie theatres and shopping malls in 10 years, but I suspect those still operating will be quite a bit different than the ones out there today. Change isn’t just for tech companies, it’s for everyone that wants to succeed. The corporate graveyard is filled with companies that failed to adapt.
Today, Zion Williamson is 20. Kevin Hart turns 41. Sylvester Stallone and former President George Bush are both 74.