“Life was meant to be lived, and curiosity must be kept alive. One must never, for any reason, turn his back on life.” ~ Eleanor Roosevelt
Question: You’ve discussed that there will be “winners and losers” going into the fourth quarter of 2020 and beyond. Would you expand on how different parts of the economy may recover?
Answer: Anticipating the future is a lot like playing chess and trying to predict your opponent’s next few moves. Add to that back and forth exchanges of power with a goal of hopefully avoiding any miscalculations, and you have a pretty good analogy of how current financial environments exist.
Monopoly, The Game of Life, and 3D Tic-Tac-Toe were a few of my favorite childhood games all of which required strategic thinking and planning. Forecasting expectations for financial, social and political markets are more akin to a Four-Dimensional Chess game at this time. Our grandkids were just in town, and fortunately, they still enjoy playing board games with Papa and Yaya. In addition to those already mentioned, Battleship is a family favorite game. The last thing anyone wants to hear in reference to their portfolio and financial plan is “You sunk my battleship!” With that in mind, let’s take a look across the board at various industry sectors as they may relate to the current environment.
As expected, different parts of the economy will recover at varying paces and magnitudes. In some ways, the recovery is at a stalemate with industries such as hotels, airlines, restaurants and most hospitality/leisure businesses still plagued by social distancing protocols, psychological barriers and actual permanent business closures already announced. The larger capitalized companies, especially in technology, software, communication services, consumer discretionary and healthcare, have on a whole, weathered the pandemic better than other areas. Chess players take time to analyze the board, ensuring the next move is the most beneficial, even if it’s not always the most obvious choice.
Of the eleven sectors, in the near-term, political uncertainty may influence trends. Healthcare is one example of an area under the microscope as we sort through the replacement of Supreme Court Justice Ruth Bader Ginsberg and face headwinds during the presidential election process. Technology could be challenged in the short-term, yet as we move forward, this area is likely to benefit from permanent changes to how we interact as a result of COVID-19. Communication services and consumer discretionary are sectors that may fall in this same category.
As the economy recovers, sectors to keep a close eye on are materials, financials, industrials, and consumer staples. As we wait to see if there will be another up-tick in COVID cases in Europe, the US, and around the world, low–interest rates may help offset the impact of other economic headwinds.
During the shutdown, inventory levels declined due to a lack of production. Production is currently ramping up as the world re-stocks based on global manufacturing data. Typically, as manufacturing picks up, cyclical sectors strengthen. An example of this is our recent search for bicycles for the family. The economic theory of supply and demand influencing pricing and consumption holds true in this category.
More uncertainty may remain for commercial real estate, especially in the retail and office categories. How this may look going forward is uncertain, however, I do recall a time prior to the internet and the cloud for data storage, when commercial space demand was greater due to the need for legal libraries and massive amounts of file space for documentation. Disruption is typically followed by evolution, and we’re in the midst of that sort of cycle.
Most investors should seek diversity to balance risk versus reward. For this reason, even the least-favored sectors may be appropriate. As always, consult your team of trusted financial advisors to formulate a strategy that’s custom-made for your personal preferences, needs and goals. Watching trends in the three areas of leading economic indicators, jobs reports and inflation rates may help us navigate our way.
Whether it is going back to work, restaurants, flying on an airplane or attending a crowded sporting event, there appears to be a reluctance by many to return to their pre-COVID-19 activities. The psychological impact of the virus will likely impact these critical components of the U.S. economy for the foreseeable future. Stay focused and plan accordingly.
There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The opinions expressed are those of the writer as of October 14, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.
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