Stocks continue to soar on vaccine news, and hints that the latest viral surge in Europe may have passed its peak. This as Americans prepare for Thanksgiving weekend, one that will be subdued compared to past holiday periods, but still presenting an uptick in social gatherings that may help to keep case counts high in this country.
But stocks look ahead. About 6-9 months ahead. That takes us to next summer. With the likelihood that at least 3 vaccine candidates will be approved very soon, the thought of herd immunity by the second half of 2021 and a return to some semblance of normality is increasing, particularly given initial signs that the vaccines will be highly effective.
The timing is key. Over the past few weeks, we have all been celebrating the vaccine news from Pfizer#, Moderna, and Astra Zeneca. Certainly, the efficacy data has been a big positive surprise. But the timetable hasn’t really changed much. Granted, the data has reaffirmed expectations and reduced risks of failure. But for months leading epidemiologists have been talking about fairly widespread availability within the first half of 2021. However, six months ago, that was too far over the horizon to dominate stock performance. Investors were still focusing on recovering from the first wave of the virus. Focus was on just getting to where we are today, which is smack in the midst of the largest surge. Now, with the economic impact of the surge relatively contained, it’s time to look beyond. Certainly, from a personal point of view, we all must be vigilant. The virus is still upon us and highly dangerous. Economically, however, we can see when the sun will shine again. And that is what has stocks moving.
Of course, the pending change in administrations is a factor as well. But the real message so far is that very little change seems likely. Again, I am only talking in economic terms. It remains very unclear what stance Republicans will take. But with the likelihood of a split Congress, we see little economic legislation coming down the pike that will move the economic needle. There may be another Covid-19 relief bill. However, the impact will be short term, and again not one that will change the long-term outcome.
Since Election Day, with all its uncertainties past, and good vaccine news pending, stocks began the November surge, one that to date has proven to be one of the strongest in decades. You wouldn’t know it watching the FANG stocks and other tech leaders. At best, they have traded sideways since Labor Day. No, this surge has been led by companies that seemingly had been given up for dead during the pandemic. Back last winter, oil futures literally flirted with zero. In one crazy session on a day when some futures expired, prices even went negative. Traders were paying the buyer to get rid of contracts rather than take delivery of a resource with real value. Retail stocks plunged as stores shut their doors. Cruise ship and airline stocks suffered similar fates.
Cruise ships remain in drydock. Although holiday travel is helping the airline industry, passenger seat miles flown are still down over 60%. No one is flying overseas. Stores have reopened but traffic is limited. Center city hotels are still largely empty. But we all know that when the pandemic ends we will fly again, travel again, and eat in a fine restaurant again. Yes, the pandemic will bring changes, and there will be residual damage that may take years to overcome in some cases. However, now that we can see daylight, these damaged industries are investable again.
Since Election Day, the entire S&P energy sector is up over 40% in value. Last night Nordstrom reported better than expected earnings. They weren’t good, at least compared to last year, but they beat expectations. After the overnight bump in its stock, it is now almost 100% higher than it was on Election Day. Many stocks of hotel chains are up more than a third over the same time period. Cruise ship stocks are among the other winners. In short, those lagging behind have been catching up.
The real questions are (1) have they caught up, and (2) if they have or when they do, what takes the market on its next leg higher?
No one can answer the first for sure. But many of the aforementioned industries are now back to levels last seen in February at the cusp of the pandemic. Even before the pandemic, there were gray clouds. Conventional retailers were losing market share to online merchants. Both airlines and cruise ships were witnessing a surge in capacity. Oil inventories were high even before the pandemic crushed demand. I can’t tell you if the recovery is complete, but I certainly can note that for at least some, the rally has sharply reduced the number of bargains. Clouds remain. Online competition for retailers hasn’t slowed. If anything, it has accelerated. Airlines and cruise ship companies have had to raise lots of capital via debt and equity offerings that will mute the ultimate recovery in their stock prices. The oil industry will remain oversupplied for some time, and technology (e.g. more electric cars) will mute future demand. Should oil demand ever catch up with supply, the industry knows where to find more supply almost immediately. As for banks, there are two certainties. Short-term rates are going to stay low for a very long time, and small business bankruptcies are going to climb.
So, is the short-term shift in leadership sustainable? It could be for the very short term but my guess is that the catch up is about done. One of two things happen then. Either stocks go up in unison, or leadership reverts to those companies that persistently meet or exceed expectations. Almost certainly, that means the latter. That doesn’t mean, however, that the old leaders will be the new leaders. Leadership companies need to sustain growth and surprise investors to the upside. That is hard to sustain for two reasons. First, the laws of large numbers make it harder to grow significantly faster than the economy or one’s sector as a company grows larger. Second, when companies persistently beat expectations, analysts and investors raise expectations. They expect further beats and adjust expectations accordingly. Ultimately, that makes expectations impossible to beat.
In addition, there are many companies that benefitted from the pandemic. Once the pandemic is over, it is unlikely that we will all hoard toilet paper or Lysol. Stores that remained open, sold essentials or had a strong online presence clearly gained share. Maybe they can hold that share, or at least most of it, when the pandemic ends. But can stores as big as Wal-Mart# or Costco continue to grow sales 2-3 times overall retail sales indefinitely? Can they still gain share at the same pace after the pandemic ends? Doubtful. Thus, while the Walmart’s and Costcos of this world had outsized earnings gains in 2020 while airlines and hotels bled money, once the pandemic ends it will be the latter who have big year-over-year surges in business, while Walmart and Costco settle back toward normal. Perhaps that is why Walmart’s shares in recent weeks have been moving sideways, even after a very strong earnings report.
None of the above is an invitation to sell your Walmart to buy an airline. Airlines still have plenty of problems, lots of competition, and weakened balance sheets. Walmart may cede some market share over the next year as normality returns, but the company has a bright future, particularly now that it has built an enormous omnichannel presence.
It’s hard to tell where future leadership will come from. I can’t see airlines and banks being the leaders. And valuation suggests the sun won’t shine as brightly on tech stocks the way it has in 2020. Therefore, it all comes down to each company’s ability to meet or exceed expectations. There will be hot new growth areas for sure. There will still be a buzz around electric vehicles, fuel cells and hydrogen. The movement to the cloud is still in the middle innings. 5G will open up whole new worlds although probably not in 2021. We will also take cues from Washington. Green is likely to be a favorite color of President-elect Biden as he reenters the Paris Climate Accord. In other words, stock picking is going to matter in 2021, not just selecting the right (or wrong) sectors.
For those of you into Wing Bowl and other eating contests, Joey Chestnut is 37 today. For those of you who were fans of Married With Children, Christina Applegate, who played Kelly Bundy, turns 49 today.
James M. Meyer, CFA 610-260-2220