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May Thoughts from the Research Desk Thumbnail

May Thoughts from the Research Desk

In the last few weekly pieces that we wrote, we identified several factors that investors have cited as reasons for the equity market recovering in the way that it has. One of them is signs of optimism around the economy opening up and things slowly returning to normal. Different investors have differing opinions as to the time frame of a "return to normal" and, what normal would look like - that's what makes the market move. No matter what their opinions are, as data is slowly released, they will reassess their beliefs and their holdings and the market will move accordingly. Using research from Goldman Sachs and Natixis, here is where things currently stand.

The ability and effectiveness to social distance are creating a bifurcated restart of the economy (this, in addition to different states having different guidelines for re-opening). The businesses where social distancing is easy to adapt (retail, recreation) are doing better than where social distancing is difficult (entertainment, bars & lounges). Goldman Sachs has put together a scale to track the US re-opening, on a scale from 1 (lockdown) to 10 (fully open). For their calculation, they broke up data into two categories: "Stay at Home" and "Back to Normal." The first category includes data around food delivery, eCommerce, streaming media, grocery sales, etc.). The latter - "commuting, box office, travel, freight, housing, equipment sales, etc.). Their goal is to compare these metrics to the previous year to gauge the re-opening of the U.S. economy. Their internal score had the U.S. at a low of 36 in late March. It has now crawled up to 46. A score over 100 would reflect that the U.S. economy is “fully open.”

There are a couple of developments that are driving the GS number higher. Memorial Day Weekend saw solid trends in places such as Daytona Beach, FL, Huntington Beach, CA, and Lake of the Ozarks, MO. Places that consumers can drive to will look to recover quicker than others, and perhaps more traditional, tourist destinations. Regional casinos that have re-opened in Arizona, Louisiana, and Mississippi have seen long lines. Using data from Verizon, handoff metrics (the times when a data session moves from one cell site to another as users walk or drive around), have shown that 44 states have had increases in mobility over the last two weeks (as of May 21st) and 36% of the states have surpassed their pre-COVID levels. 

An interesting development that both GS and Natixis have noted is that consumers are spending a lot in home supply stores. Home Depot has seen a significant acceleration of sales in May and is not planning for negative comparables (to the previous year) in 2020. Lowe’s has seen strength in Do-It-Yourself merchandising and that April levels mirror years prior and May is trending upwards (in other words, Lowe’s May 2020 sales are higher than May 2019). In addition to home improvement, home builders and home sale numbers have also seen improvement. Given the low mortgage rate environment, the lack of activity in April, and the possibility of an influx of new homeowners that are moving away from concentrated urban areas, this summer could very well see a lot of activity in real estate.

As it currently stands, economic data in May is "less bad" than it was in April, which shows positive economic activity. But there is still a long way to go. In a separate piece, GS writes that "recovery in global risk sentiment has reflected a policy driven reduction in left-tail risk rather than a clear increase in investor confidence about a continued cyclical upswing in economic activity." Investors are cognizant of a possible slow economic recovery. The real question here is - what happens if the recovery is worse than anticipated? 

Right now, industries that intuitively benefit from a lockdown are continuing to perform well, some higher than anticipated. In their research, Natixis broke down stocks into a couple of different baskets – the Reopen and the Stay Home. The Reopen includes the likes of Auto, Commercial Real Estate, Hotels, Casinos, Theme Parks, etc. The Stay Home includes Groceries, Alcohol & Take Out, Health Care Home Entertainment, IT, and eCommerce. As we see below, the Stay Home “basket” is outperforming the S&P 1500 index and the Reopen basket. 

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Despite the easing of the lockdown (and re-opening of retail & dining in some parts of the U.S), eCommerce, streaming media, and online payments have all seen an acceleration in metrics that Goldman Sachs tracks. This party is reflected in the “Stay Home” basket performing in the way that it has - after all, companies that are benefitting from this, the likes of Amazon, Microsoft (Skype), Netflix, Facebook (Instagram & WhatsApp) are driving the markets. When we start to see that spread converge, when we see investors rotate into traditional value stocks (we saw that a little bit this week) - that’s when investors will be betting that the economy is truly ready to re-open.