The K-Shaped Recovery: How to Invest
I used to think it was too simplistic, using a letter of the alphabet to describe economic activity. But the dynamic I’m currently witnessing has changed my mind.
We’re clearly in the midst of a K-shaped economic recovery, whereby two lines start together and then branch out. Consequently, certain segments of the employment force are faring much better than others.
This divergence is creating human misery for those on the downslope. However, as I explain below, the suffering will be temporary. We’re in the throes of “creative destruction” that will eventually give birth to a broad-based economic recovery and secular bull market.
Wall Street seems to share my optimism. On Monday, the Dow Jones Industrial Average rose 237.52 points (+0.76%) and the S&P 500 climbed 28.76 points (+0.74%), with both indices closing at record highs. The tech-heavy NASDAQ jumped 131.35 points (+0.95%), setting a new intraday record. Energy stocks led gainers, as crude oil prices rose to their highest level in more than a year.
The Dow and the S&P 500 on Monday rose for the sixth straight session, their longest streak of gains since August. Better-than-expected quarterly earnings results are adding to bullish sentiment. In a sign that investors are counting on strong economic growth down the road, the small-cap benchmark Russell 2000 leapt 2.5% to another record high.
In pre-market trading Tuesday, stock futures were little changed. Investors are awaiting the fate of stimulus talks in Congress. On a simultaneous track in Washington, ex-President Trump’s second impeachment trial is underway. The Senate trial will figure prominently in the history books, but from the perspective of Wall Street, it’s a non-event. Instead, keep your eye on stimulus. The latest economic data are making the case that the relief bill is needed.
The U.S. government’s Friday jobs report showed continued weakness in the labor market, with the U.S. economy adding only 49,000 jobs in January, according to the Bureau of Labor Statistics. The number fell considerably short of the 105,000 expected.
The unemployment rate dipped by 0.4 percentage point to 6.3% in January, a welcome but only slight improvement. It’s also important to note that the labor force participation rate is lower than it was before the coronavirus outbreak, as many frustrated Americans quit looking for jobs.
To have and have not…
The pandemic has exacerbated disparities in the workforce, as the gap between skilled and lower-skilled labor gets wider. Minorities and women are afflicted with higher rates of unemployment than white men; lower levels of education are getting punished worse than ever.
If you possess the skills to work from home, you’re probably doing fine. But if your job requires human interaction outside of the home, you’re struggling economically (and you face a greater health threat). COVID-19 has made the class divide worse, with workers experiencing different daily realities. This bifurcation also helps explain the disconnect between a struggling economy and the stock market rally. The comfortably employed account for a disproportionate level of stock ownership.
According to Indeed, a worldwide employment web site, job postings have declined the most in industries directly affected by pandemic-induced lockdowns, such as hospitality and tourism (see chart).
The recovery’s inequality is even apparent within sectors. For example, consumer retail spending has largely recovered, but skilled, higher-wage retail workers have gotten their jobs back whereas lower-wage retail workers haven’t.
Real human pain is at stake here, but these wrenching changes are planting the seeds of future rejuvenation. When the coronavirus crisis finally fades, the surviving companies will be in even stronger shape than they were before.
It’s not just tech giants that will thrive. Entrepreneurial innovation is taking hold. According to a recent analysis by the Economic Innovation Group, nearly 4.5 million business applications were filed in 2020, an increase of 24% from the year before and the highest number on record.
Massive fiscal stimulus is almost assured of becoming law; it will provide a bridge for struggling workers and households until they can get a foothold in the new economy on the other side of the pandemic.
Generally over the long haul, the biggest stock market winners are companies that defy the status-quo and introduce disruptive new technologies that create entirely new industries and products. These companies will be the job generators of 2021 and beyond.
During the coronavirus pandemic, e-commerce companies are significantly boosting employment to meet skyrocketing demand from consumers. Social media companies are reporting surges in activity. Streaming video is prospering, as people avoid physical theaters to binge watch movies and shows at home. Online realtors, marijuana dispensaries, video game makers, meal prep delivery services, telehealth…these types of companies are getting huge boosts from the pandemic.
So far, fourth-quarter 2020 earnings results have been robust for the pandemic winners. Their earnings guidance for first quarter and full-year 2021 are highly encouraging as well.
At the same time, consumer debt is relatively low and household savings rates are high. The number of coronavirus cases is dropping and vaccines are proliferating. Pent-up consumer demand will soon be unleashed. You need to position your portfolio now, for the economic resurgence ahead.
That’s why I suggest you take a look at our new report: “5 Red Hot Stocks to Own in 2021.” In this report, we provide the names and ticker symbols of high-quality, rock-solid growth stocks that are poised to prosper under the conditions that I’ve just described. Click here for your copy.