Recovery road map

A perspective from E*TRADE Securities 06/26/20

On June 22, city dwellers in what was once the epicenter of the coronavirus outbreak in the US were allowed to enjoy a meal (outside) at their favorite restaurant for the first time in more than three months. Some of them may have even returned to work at their Manhattan offices. But those experiences probably looked much different: empty subway cars and elevators, required temperature checks, and—perhaps most baffling—elbow room.

Nonetheless, Wall Street appears to be putting faith in the nascent economic recovery: Despite being down 30% just 12 weeks ago, the market is now nearly flat for the year.

Not all sectors are faring as well as others in the new limited-capacity, mask-wearing era, though, and investors looking for opportunities in the post-pandemic world will need to stay abreast of what will likely be an evolving landscape. While broad-market exposure is always a solid game plan, the highfliers and laggards that have appeared in the market over the past few months may be highlighting new potential trends that informed investors should be aware of. 

Highfliers: Tech, discretionary

One area that has undoubtedly flexed its muscles in the stay-at-home era has been technology—especially technology that has been critical to allowing so many companies to get their workforces running remotely.

The tech-heavy Nasdaq Composite index has a double-digit percentage return for the year and hit a new record high on June 23. And with more companies shifting gears to permanent work-from-home environments (Facebook, Twitter, and Shopify are among the big names allowing workers to set up virtual offices indefinitely), tech stocks tied to digital infrastructure like communications, cloud, and security may be positioned for long-term growth.

Source: FactSet Research Systems


While tech led the market to the upside early on, a rise in cyclical sectors (stocks that tend to move in the same direction as the economy) has helped fuel the latest leg of the market’s ascent. And recent economic data indicates Americans could be more willing to open their wallets as businesses reopen their doors—possibly giving these areas more room to run. Consumer sentiment rose for the second-straight month in June1 and May retail sales bounced back at a historic clip,2 which may leave investors eyeing some consumer discretionary stocks for a rebound, particularly areas like retail and restaurants, which could benefit from an uptick in consumer spending.3

Laggards: Real estate, travel & leisure

As much as the shift to a virtual work culture has boosted the demand for communications and security tech, it has turned the commercial real estate market upside down. After an unprecedented and largely successful work-from-home experiment, companies may increasingly look to shrink their office footprints.  

The industry may also face longer-term headwinds because of the potentially permanent loss of smaller, local businesses that don’t survive the lockdown, as well as the accelerating pressure some larger brick-and-mortar retailers face from online shopping. In June, CBL & Associates became the first major retail landlord to miss an interest payment to bondholders during the coronavirus pandemic, as many of its tenants requested rent relief.

Travel and hospitality companies such as airlines, hotels, cruise lines, and amusement parks were among the earliest and most severe casualties of the coronavirus sell-off, with many falling more than twice as much as the broad market. Although many of these stocks have recovered some ground from their early lows, the future of these industries is unclear in a world reshaped by Covid-19, and changes in business operations may outlast the pandemic, especially if consumers are apprehensive about gathering in large crowds. It won’t be back to business as usual for the foreseeable future, with airlines and theme parks operating at reduced capacity and US cruises on pause until September 15.5 

Source: FactSet Research Systems


Gauging the path ahead

Key for both the economy and the markets is whether consumers will resume their pre-pandemic spending habits. With the American consumer powering nearly 70% of the country’s GDP, market watchers will be closely monitoring behavior for any sign that new consumer patterns—good and bad—are here to stay.

While traditional economic data like jobless claims, consumer spending, and retail sales, will hold obvious clues, there are a few other unconventional factors that may be helpful in gauging the course of recovery:

  • New virus infections vs. deaths: It’s a dark but critical metric, as daily new cases have surged in some states while related deaths have generally declined across the country. Should the virus begin to be viewed as an acceptable threat, the recovery could accelerate. But if deaths rise as the summer fades into fall and flu season comes into focus, reopening plans could grind to a halt—or even reverse course.
  • Travel and public transportation: While US travelers are flying in numbers not seen since March, airport foot traffic still remains far below pre-pandemic levels.6 Searches for directions via public transportation have also been slow to recover, while driving and walking direction searches have increased,6 suggesting people may still be hesitant to gather en masse.
  • Restaurant reservations, home-delivery spending: Data from reservation apps shows dining out has picked up in several cities after plunging in March and April.6 Another positive sign that people are leaving the house? Online spending on grocery pickup and delivery has also fallen off.6

Any way you look at it, though, the path ahead is long. Regardless of what the latest economic data may be indicating, investors should keep their eyes set on the far horizon and portfolios mapped to individual timelines, long-term goals, and risk tolerance.

  1. MarketWatch, “Consumer sentiment climbs again in June as reopening U.S. economy eases worries,” 6/12/20, https://www.marketwatch.com/story/consumer-sentiment-climbs-again-in-june-as-reopening-us-economy-eases-worries-2020-06-12
  2. The Wall Street Journal, “U.S. Retail Sales Rose Record 18% in May,” 6/16/20, https://www.wsj.com/articles/shoppers-returned-in-may-likely-spurring-increased-retail-sales-11592299802?mod=djemMoneyBeat_us
  3. The Wall Street Journal, “Discretionary Stocks Are Making a Comeback,” 6/9/20, https://www.wsj.com/articles/discretionary-stocks-are-making-a-comeback-11591738632?mod=djemMoneyBeat_us
  4. The Wall Street Journal, “Mall Owner CBL Misses Debt Payment, Seeks Renegotiation,” 6/2/20, https://www.wsj.com/articles/mall-owner-cbl-misses-debt-payment-seeks-renegotiation-11591133967
  5. CNBC, “Cruise lines voluntarily suspend all trips out of U.S. ports until Sept. 15, trade group says,” 6/20/20, https://www.cnbc.com/2020/06/19/cruise-lines-voluntarily-suspend-all-trips-out-of-us-ports-until-sept-15-trade-group-says.html
  6. The Wall Street Journal, “Restaurant Reservations, Driving Directions and Other Indicators Wall Street Is Watching,” 6/21/20, https://www.wsj.com/articles/restaurant-reservations-driving-directions-and-other-indicators-wall-street-is-watching-11592740801

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