There may be long-term changes to your investing strategy as social distancing measures take hold to stop the spread of coronavirus. Social distancing has affected our lives in somewhat strange ways. Handshakes have given way to nods and waves. Masks are now fashion accessories. Rush hour traffic is a term probably more applicable to the Internet rather than the streets. And hotspots now refer to cities with a significant number of coronavirus cases rather than locations of wireless networks. Undoubtedly, over the past six or so weeks, the COVID-19 pandemic has changed our behaviors. While many are starting to wonder what changes will wane and what changes will remain – investors are making similar calculations.
Let’s take a closer look at how industries have been affected and try to understand what is temporary versus long-term, and more importantly, where opportunities lie.
Here are 5 sectors of the economy that have been greatly affected by social distancing – and how to tailor your investing strategy to these changes.
1: Electricity Usage down 8%
How coronavirus has affected electricity usage:
- While the economical impact of all the closed businesses will take months to analyze, a quick look at energy usage across the country shows a sharp and quick decline over the past few weeks (~ 8%)*
- For comparison, during the first year and a half of the great recession starting in 2007, electricity consumption declined ~ 5.5%**
- Over the month of March, hospitals did see an increase in energy usage of ~16%***
Considerations for your investment strategy:
Electricity usage is typically thought of as a key gauge of economic health, with falling electricity usage signaling economic weakness. But as my colleague Pete Carmasino notes in his recent blog post on investing in Black Swan Events, the utilities sector tends to consistently outperform during the recession stage of the business cycle.
Take a look at an exchange traded fund that tracks stocks in the utilities sector – the Utilities SPDR ETF (ticker: XLU). PortfolioWise, an ETF ratings platform, has a neutral overall rating for this ETF. PortfolioWise tracks underlying stocks as well as ETF price trends and uses that data to predict where the ETF’s price might be headed in the future.
The majority of stocks in this ETF, which are largely electric utility companies, are also neutral. While Utilities may not be trendy, high growth companies that attract the most media attention, there may be other reasons for having them in your portfolio such as low risk and strong dividend yields.
2: Internet Usage: up (as much as) 50%
How coronavirus has affected Internet usage:
- With the shift from schools and businesses to homes, internet usage, particularly in states where social distancing was heavily practiced, increased as much as 50% in New York and New Jersey*
- People are turning to streaming and other digital sources of entertainment. Netflix showed that paid subscriptions jumped 32% the week of March 16**
- Internet speeds and quality declined only slightly with this increased usage*
Considerations for your investment strategy:
As boredom sets in or people “move their lives online” to continue their social interactions, many companies could benefit from this wave of activity. Already, Telecommunications giant, Verizon (VZ +9.82%), has seen a 10% increase in their stock price and had a bullish rating change as the price climbed over its long term trend. Netflix (NFLX +13.13%) saw a 13% increase and actually hit a new 52 week high in their stock price within the last month. XLC, a very liquid ETF that tracks stocks in the Communications Services sector and holds Verizon and Netflix, among other related stocks, has just started to rise above its long term average again, which might signal positive momentum if it continues. A neutral rating from PortfolioWise still suggests proceeding with caution.
3: Grocery Sales: up 56+%
Retailers have had to act fast to keep up with the demand.
How coronavirus has impacted grocery sales:
- The pandemic has spurred a significant increase in online grocery shopping, which was up over 56%* in mid April versus a similar time last year*
- Major grocery chains also reported an increase in store traffic between 15% – 40%**
- Instacart, Walmart’s grocery app, and Shipt both saw download increases of 218%, 160%, and 124%*** versus the same time last year
- The chart above shows data for consumer packaged goods – a fancy term for groceries
Considerations for your investment strategy:
There are two main categories in the Consumer Staples sector:
- the companies that manufacture products, and
- the distributors of those products, such as grocery stores, pharmacies, or big-box retailers that sell them to individuals.
There has been a tremendous increase in sales from consumer goods, with internet sales soaring as a channel to reach new audiences. The question here is for how long will this rush on products continue? XLP, the SPDR Consumer Staples ETF holds companies that operate in both categories and currently has a neutral rating from the PortfolioWise system. The Proctor and Gamble Company, which makes up the highest allocation of the ETF at 16%, has a bearish rating, largely due to poor Financials and Earnings. As the year progresses and that and other consumer packaged goods companies report new earnings, this is an area of the market to watch.
4: Air Travel down 95%
How coronavirus has affected air travel:
- The number of travelers passing through TSA was just over 100K as compared to more than 2M in April of last year*, a drop of more than 95%**
- For comparison, in 2009, global air travel demand decreased 3.5% at the height of the recession, which was the largest yearly global demand decline since World War II***
- Delta’s CEO, Ed Bastian, put this into perspective when he said it could take two to three years for businesses to recover
Considerations for your investment strategy:
Both business and personal travel typically go down during a recession. However, with the nature of the crisis, this isn’t just about tighter budgets or lack of funds for leisure spending. The physical constraints and closed nature of an airplane unfortunately create the exact environment that we are encouraged to avoid. Not only will it take a while for people to rebuild their confidence in air travel, but going forward, this could change the nature or business model of the industry itself. With that background, it’s no surprise that the 3-6 month outlook for JETS, the only airline-focused ETF, is bearish, according to PortfolioWise.
5: Online Meetings up (as much as) 340%
How coronavirus has affected online meetings:
- As of March 22, Zoom’s daily active user count was up 378% from a year earlier, and 340% from the end of December*
- Microsoft Teams grew from 20 million daily active users in November of 2019 to 44 million by March 19, with 8 million daily active users added within the previous week**
- With the rapid increase in online meetings, security issues become a notable challenge for these top providers***
Considerations for your investment strategy:
While the obvious Zoom, Google and Microsoft stand out, this may be an area to “look under the hood”! A number of companies support these online operations, for example to add security, or help with scheduling/ calendar management. Looking to a broader Technology ETF with exposure to these and other tech companies that might not be on your radar could have unexpected benefits over purchasing individual stocks. Below we look at XITK, The SPDR Innovative Technology ETF, which currently has a bullish rating in PortfolioWise. It has exposure to Zoom and a few other up and coming technology companies, albeit with a smaller smaller assets under management.
The stay-at-home orders only apply to people; the money isn’t standing still, it’s shifting. Healthcare is another sector that has broken away, while oil, of course, has taken a face dive. An adjusting society and economy will inevitably lead to new long-term opportunities. Look to diversify within strong sectors and you’ll likely find hidden gems.