What will the Recovery Look Like?

I don’t remember a time when there was more uncertainty about the economy, equity markets, debt markets, and with interest rates, volatility, and currencies. There is no comparison! We can analyze how a global health crisis can bleed into a global economic crisis, while at the same time trying to be supported by global central banks via historic fiscal and monetary stimulus. There are so many moving parts to this unprecedented crisis it makes the recovery plan’s outcome very difficult to predict.

However, today’s crisis might be the catalyst to cleanse the system of bad companies that have been dying for years and just holding on. If a company can make it through this period, and even thrive, money will flow heavily in that direction. Consider this earnings season and next the litmus test for the brands that people will want to own going forward. I think we all must realize that strong economic data will, and financial markets will drive the recovery over time.  Yes, let’s not forget that we will indeed recover over time. We always do! With that in mind, I’ll take a stab at what I think this recovery will look like.

My best guess: An uneven recovery.

First, let me discuss how one might consider investing in this crisis and the uneven recovery I see. In my opinion, investors and financial advisors need to be more concentrated, more flexible, more tactical, and be willing to hold more transitional/tactical cash that they are comfortable with. The bad news: most advisors admit this is not their core strength and need help plus broad based and market focused ETF’s are not the best positioned for an uneven recovery. Why? They must be fully invested at all times and they typically hold too many securities. There will be clear winners, those that lose less, and those companies that lose bigtime but when you own an Index ETF, you own the good with the bad. I have said this many times, but I do not think the massive flows to passive ETF’s will serve investors well over the next three years at least. It’s just not ideal to own everything all the time. Sometimes, being more focused is best, now is one of those times.

Why do I think the recovery will be uneven?

In an economy driven by 70%+ consumer spending, it’s the consumption recovery that makes me think the overall recovery will be uneven. We know the economy will likely begin opening over the next month or two, but we also know consumers will not go right back to doing the same things. We will likely tiptoe out for the most in-demand items and reward ourselves with a few selfish pleasures after being cooped up for so long. I can almost guarantee your monthly spending will look narrower over the next six months when compared with the last three years.

What could win? Nothing makes us more interested in home improvements and upgrading certain home items like being stuck in our houses for a month or two straight. My family wants to eat something other than dad’s food every day so I suspect people will trickle out to their favorite restaurants, at least for take-out and using smart-distancing tactics. Certain other services like movie theatres, concerts, non-favorite retail shopping, airline travel and general travel will likely be slower to recover. We will continue to use e-commerce more robustly. Every family will likely do a “this versus that” analysis which assures the recovery will be uneven or lumpy. Vital healthcare spending and digital transformation businesses will continue to thrive. Telemedicine will likely be a theme we will continue to consider. E-commerce will continue to eat away at physical retail and omni-channel capabilities will absolutely be a focus. Having physical and online buying is supremely important. Again, this is the reason owning 500 to3,000 stocks is likely to disappoint, there just aren’t that many companies well positioned for the new world we live in.

One positive out of this situation: Retail sales which is 30% of GDP has never looked worse, in the history of the data. History is a very long time so as an opportunist, I like adding key retail exposure at a time when the data is historically bad. Many of the best gains happen when we go from horrendously bad to just slightly less bad. We should expect retail sales to be low and lumpy but that’s the opportunity for mean reversionists. Here’s Dwyerstrategy.com’s retail Sales chart recently reported.

From a corporate and business spending perspective I think the spending will also be uneven. Companies have undergone a significant amount of damage short term. It will take time to repair balance sheets, cash flow generation and revenue growth. Companies will likely try to do more with less which means they likely enhance spending on productivity tools, security initiatives, and strategic consulting initiatives. Retailers will beef up their online and delivery capabilities bigtime. I believe more companies will focus heavily on cost cutting strategies and try and do more with less people. Sadly, that means employment will be slow to return. Office space and rents have to come down. Considering utilizing less corporate office space is a keyway for companies to tighten their belts. Technology purchases to boost remote workplace initiatives will likely be robust. Enhanced Internet bandwidth and telecom usage will be necessary. Tech providers will be forced to be creative to get other companies to spend money. Cisco Systems was the first company announcing this type of program. They are offering extended finance terms and no payments for three months to get firms to initiate capital expenditures. We will see much more of this for the rest of the year. I suspect every company will go back to their vendors and try and negotiate better terms and the vendor will accept those terms to not lose the client. That puts pressure on margins so as an investor we must plan for a world where non-core products might suffer pricing erosion simply to keep the business. Like consumers, corporations are doing the “this versus that” analysis to make sure they are cutting costs and only spending capex on vital business segments.

Stock picking:

If consumers and corporations are not spending as evenly, revenues will be uneven, therefore stock prices will be uneven. If you own all stocks in an index, your positive bets get diluted with negative bets, if you can be concentrated and tactical, you have more ways to win. Yes, that’s talking my book, but it doesn’t make the concept any less true. Here’s the themes we think are important to focus on:

• E-commerce
• Warehouse shopping & discount stores
• Asset-light businesses that run efficiently and have the ability to cut costs easier than most.
• Vital technology categories: Cloud, cyber-security, workplace collaboration tools
• Corporate & strategic consulting services for corporate downsizing
• Credit card processing & peer to peer payments
• Athleisure purchases with high loyalty & strong online shopping capabilities
• Home improvements & upgrades
• Opportunistic investment managers with significant cash to take advantage of lower prices
• Healthcare & consumer health products & services
• Digital advertising & video streaming
• Video gaming.

BOTTOM LINE:

In summary, here are some takeaway points for investors:

• This recovery will be uneven because behavior – personal and corporate – will change.
• We will get through this crisis, but things will look different than they did before.
• Market leaders in categories that are vital will take more market share and get more powerful.
• Investing through this will require more concentration, flexibility, and more tactical uses of cash.
• We will get even more comfortable using e-commerce going forward.
• We should expect volatility across asset classes to continue for the foreseeable future.

Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.