- Expect the unexpected
- Upside down recession – the winners and the losers
- How it all stacks up – post pandemic possibilities
Back in May when the weather was nicer, a colleague of mine saw an ad from a local retailer for Adirondack chairs and decided to treat themselves. At $400 per chair, the price was not cheap. The retailer advised that it would be six weeks for delivery, as they were sold out and had to order from the factory in a different province. Spring, summer, and now fall are almost all behind us and our colleague is still waiting for their chairs. They’ve made multiple enquiries to the retailer and have called the manufacturer directly. The issue appears to be a surge in demand that the manufacturer has never seen before. Orders are up 350% and production at the factory is down due to COVID-19 protocols. At this point, our colleague will be happy to be sitting in the chairs next spring.
Expect the unexpectedWhat’s notable about this story is that it’s so unexpected. Why would a chair manufacturer see such a huge uptick in demand during the greatest economic downturn of our lifetimes? This is the opposite of what should happen in a recession.
Ordinarily, a recession brings opportunities for those who have money to spend, but this time has truly been different.The amount of stimulus injected into the global economy by governments and central banks have turned manufacturers and retailers of many non-essential goods into COVID-19 stock market winners.
Usually, we see lower personal income, a weak housing market and higher bankruptcies in a recession. This time, the opposite has occurred. Incomes are up, thanks to government handouts, and with nowhere to go (literally) consumers are spending that money on renovations, RVs, fitness equipment and, apparently, chairs among other things.
This uptick in household spending on goods has been so dramatic that U.S. consumers are now spending more on goods than they did pre COVID-19 (the trend is similar in Canada). It took more than four years for household spending on goods to recover after the last recession. Home Depot reported 23.4% same store sales growth this summer (quarter ended August 2). This means that if a store did $1M in sales for the summer of 2019, that same store did $1.234M this summer. That’s an unbelievable increase for a mature retailer. By comparison, same store sales were negative for four straight years during and after the last recession.
Of course, the biggest COVID-19 winners have been in technology. Although we question the valuation of many of these names, it does make sense that technology has led the market recovery. After all, society not only moved to work from home, but we moved to everything from home including shopping, exercise, and entertainment. Technology enabled this shift and it has been a clear winner.
The COVID-19 losers are also obvious. Anything to do with being outside the home has been hit hard. Household spending on services have fallen off a cliff. Flights, hotels, eat-in-dining and sporting events are a few examples of businesses that have been truly devastated. Spending on services held in well during the last recession, but is still down 7% this time around. The Energy sector has been another loser. If people aren’t leaving home for work or fun, then they’re not consuming as much energy. Demand is down around 10% for oil globally, and many smaller energy firms that trade in the stock market are down well over 50% on a year-to-date basis.
How it all stacks up – post pandemic possibilities
So how will our winners and losers stack up in a post-pandemic world? If we’re back to normal next summer, there will be lots of pent-up demand for travel and experiences. Consumers will likely shift spending patterns towards services such as travel, hotels, and live events and away from goods like patio furniture or renovation equipment.
We’ll be commuting more regularly, meeting up with friends and shopping outside the home. The increased level of activity will be positive for the oil industry and we could see much stronger pricing as we move from a surplus to a more balanced market. The Technology sector will likely continue to grow, but just not at the breakneck pace we’ve seen in 2020.
2020 has been a year that will be tough for the COVID-19 winners to beat in 2021. The bar is very high. For the COVID-19 losers, things cannot get much worse than 2020 and, in fact, are likely to get much better when the world returns to a semblance of normality. In other words, this year’s winners could be next year’s losers and vice versa.
With investments, we need to expect the unexpected. The best protection from the unexpected is to build diversified portfolios of quality firms, trading at reasonable valuations. This helps protect capital in rocky markets, and ensures a strong upside when the markets are calmer.