Markets were relatively calm yesterday even as Covid case counts continue to ramp up. Rumors of stimulus talks opening back up, yet again, helped boost most sectors to a positive close. This followed a 500 point intraday drop on Wednesday, precipitated by the closure of schools in New York City. Futures are basically flat. Most investors have anticipated a 2nd (or 3rd) wave this winter with schools, businesses and restaurants opening back up. Pair that with colder weather and there is no surprise that case counts are expanding on a global scale except for much of Asia. So far, stocks are taking this in stride, as if they are already pricing in a dark winter.
There is a self-fulfilling cycle present though. Once schools start closing on a sporadic time line, it then hits parents. Many dual income families rely upon schools to educate their children in class. Work schedules have been organized around these learning hours. Even hybrid learning amplified the need to adjust hourly schedules. Once you close one school, it affects another. When a teacher’s child no longer can go to class, that teacher has to stay home too. Luckily, they can jump on the Cares Act and get paid something, but that takes another teacher out of the system. Soon, there aren’t enough teachers left to educate, causing more schools to close. New Jersey, in particular, is already out of capable substitutes in certain districts.
The economic impact isn’t massive, but incrementally it does not help spending. Throw in many other industries that don’t offer work from home capabilities and the multiplier effect takes charge. Stimulus measures, especially checks sent directly to citizens, was a big help in the Spring. What is the probability both sides of the aisle will get together when election friction is still ongoing?
This could put a dent on the next few months of economic activity, just as things were perking up. Truckers are busier than ever. New homes are being built at rates not seen since 2005. The unemployment rate recovered all the way back to sub 7% in just a few months. Auto sales are back on their trend lines. American entrepreneurs already created twice as many new businesses this year than last. With massive assistance via a 70% increase in global central bank balance sheets to the tune of nearly $7T, this recovery is taking shape as we look towards a more normal world later next Spring.
All of this added up to a rotation out of stay-at-home stocks and into the reopening trade. We all know this year’s winners, led by the FANGMAN group (Facebook#, Amazon#, Netflix, Google#, Microsoft#, Apple# and Nvidia). These stocks are still up 60% in 2020. I’d like to introduce a new cyclical leadership basket that have taken hold of the market over the past few months, namely BEACHBODY. We’ve all been stuck at home or indoors for far too long. Many of us have put on the Covid pounds. We’re all anxious to get out, see friends and family. Take kids/grandkids to an amusement park. See a movie. Rent a house at the shore. We will get there. The market is pricing this into the BEACHBODY group in anticipation of a summer of fun. There’s not much time to get these Covid pounds off and into swimsuit shape!
Here are my (cherry picked) names:
Boeing#: Some airlines will require a negative rapid-covid test before boarding. Travelers may bring proof of vaccine. A lot more people will fly next year than in 2020. 2022 will be even better. After almost two years of being grounded, the 737 Max is finally getting back in the air.
Expedia#: VRBO, an alternative to AirBnB and owned by Expedia, was a huge beneficiary of localized vacations. Bigger trips are being planned for 2021. Many are using Expedia’s site to book them as travel agencies went belly up during the pandemic. The move to online booking will only increase from here.
AutoNation: Population shifting from cities to suburbs continues. Millennials are forming families today. This group goes from no car, to one or two. Low rates help keep payments manageable. Roads will be filled soon enough. Car sales will increase.
Carnival: Another vacation play. Sure, half of us will never want to go on a cruise again. Some never did. However, there is a large market for them. Cruise lines noted booking levels are nearly back to normal. When more of us have a vaccine and Covid is in the rear view mirror, this will only improve.
Hilton: Vacations were cancelled across the globe. This will come back in time. Smaller hotel operators who don’t have an online presence will be out of business. The Hilton model and notoriety lends to a recovery phase. Business travel will not come back to peak levels, but it will come back. Salespersons want to shake hands, entertain clients and close deals face to face.
Bookings: Similar to Expedia, but a leader in Europe. Anyone planning a trip over the pond is likely to use their expansive site. Again, they are taking share from a wide open industry.
Omnicom: During downturns, ad spending gets shut off. Advertising stocks get crushed. Now that we’re coming out of the recession, this spending will ramp back up. Sports are coming back. Travel markets have to spend again. The Olympics, hopefully, will work out. There is a lot of pent up capital to be spent here.
Disney#: Parks were also massive losers during the pandemic. Vacation plans are typically postponed, not cancelled. Disney parks will get back to peak levels over the next few years. Mickey Mouse just celebrated his 92nd birthday. I can’t imagine a world where he doesn’t celebrate another 92 years. Billion dollar movies are in the pipeline.
Yelp: A lot of our favorite restaurants and shops are closed. New ones will pop up in their place. We will rely upon reviews to gauge which place is taking over. Yelp could be really busy in 2021.
Again, I cherry picked the names to fit the term, but it follows a clear theme. If all goes according to plan, the second half of next year is going to look a lot different than this one. Venturing out of the house and spending money in all the places we neglected leads to a different investment posture. This has already been happening under the surface. The Nasdaq peaked in September. Since then, FANGMAN is down 10%. BEACHBODY is up 14%. This month alone, the old leaders are up 6% vs 32% for the cyclical recovery stocks. Caution is warranted though as the rally may have already gone too far too fast, similar to the Summer reversal. A couple of months does not make a market.
Valuations are also a key point. The growth leaders grew earnings by 35% during the pandemic, but still trade at 40x next year’s estimates. BEACHBODY’s earnings went negative in 2020. It’s no wonder the stocks suffered. Now, they only trade at 14x last year’s earnings. It may take a couple of years to get back to those levels, but investors will see true value when we reopen. We continue to monitor the rotation. The longer this dark winter is here, the higher likelihood of a pullback and vice versa.
Former Vice President, President Elect and future President Joe Biden turns 78 today (I think I covered the spectrum there for everyone).
James Vogt, 610-260-2214