The COVID-19 Damage Is Far From Over… Here Are the Four Sectors That Will Suffer the Most
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If you think the worst is over in the fight against COVID-19, think again…
Just yesterday, Florida saw its all-time highest daily death toll, with 132 reported deaths. And as of Monday, the weekly average of new coronavirus cases increased by more than 40% in at least 12 states.
It’s no surprise, then, that many states are rushing to roll back their plans to reopen. But while this is happening in the economy, stocks are pricing in a full recovery. And that is a very dangerous assumption to make.
There is a huge difference between a rebound and a recovery. We are getting an economic rebound, but it is way too early to say we have recovered.
Let me explain…
These Sectors Will Suffer the Most
On Monday, I wrote that certain sectors in the U.S. economy will suffer for years from the effects of the lockdowns.
Commercial real estate is one sector that is particularly vulnerable. Companies have learned that they can manage perfectly well with far less staff on-site, relying on a blend of rotations and virtual work.
This will forever shift downwards the demand for commercial real estate. Leveraged real estate investment trusts (REITs) – which are companies that own or finance real estate – are extremely vulnerable.
Private higher education is another sector that is at risk. The cost of private universities and colleges has skyrocketed over recent decades, and I am quite sure that we will also have a big shake-out in that industry.
The top schools will continue to flourish, as they have massive endowments, and their graduates have a proven history of securing the best available jobs. There are, however, many colleges and universities that will be forced to close its doors.
Likewise, the collapse in chain store sales and department store sales has hardly recovered. This weakness will persist until consumers are ready to go out and shop en masse.
Returning to the theme of higher education, the impact of colleges and universities getting slammed should not be underestimated.
In 2019, there were 19.9 million college students, with 12.1 million of them attending full-time. That is an awful lot of buying power for all sorts of goods and services, ranging from food and drink to housing and transportation.
When the coronavirus forced schools to shut down in the spring, the impact on schools and their local communities was devastating. This fall, many schools will only open up partially, opting for partial or full-time virtual studies. Some won’t even open at all.
This will create continued hardships on college towns and campuses across the country. This loss of consumption will never be made up, so it will take years for local vendors and shopkeepers to recover from the loss, if ever.
There is another side effect from schools going virtual, which is that hundreds of thousands of international students will not be able to get visas.
This will have the additional negative impact of preventing many smart, talented, and ambitious foreigners from being able to contribute to our society and institutions. This is a terrible loss.
Yet another sector that will see continued hardship is travel and leisure.
Eventually, we will have a recovery in leisure and transportation. But until people feel absolutely safe, air traffic and hotel usage will be dramatically reduced.
Just last week, United Airlines warned its employees that a jump in coronavirus infections in parts of the South and West are jeopardizing a nascent recovery for U.S. travel. They even informed us that 36,000 jobs are at risk once the emergency financial support runs out.
They have seen a sharp drop in bookings due to new quarantine rules and fear of travel. They expect demand to remain suppressed until a widely accepted treatment and/or vaccine for COVID-19 is available.
Domestic revenues for the airline industry are 78% below the same period in 2019! And along with the drop in demand comes the risk of yet more job losses.
Hope Can Only Take the Markets So Far
When you consider these things, you can see why I am so doubtful about a V-shaped recovery.
Returning to pre-COVID levels of demand and output will take time – probably at least two years, but maybe more.
The stock market has been overly optimistic about the future, and I am afraid that the reality of earnings and growth rates will come as a huge slap to the market.
80% of the stock market didn’t even provide any guidance for earnings for the rest of 2020, so what exactly are people discounting when they are buying stocks?
If the companies don’t have a clue about what they will be earning, how can investors? There is only so far that hope can take us.
That said, given the violence of the collapse in the economic output and in the stock market, a sharp rebound in economic activity and the stock market was inevitable.
The enforced shutdown of major swaths of the economy created a distorted picture of our economy.
Still, the stock market’s rebound has been equally distorted.
Remember, a rebound and a recovery are not the same. Right now, we’re seeing an economic rebound, but it is way too early to say we have recovered.
Stocks, on the other hand, are pricing in a very rapid full recovery. The gap between the real economy and stocks grows ever wider and more dangerous.
It is very expensive for companies to close, so being forced to do so repeatedly is crushing. Aside from the sheer economic costs, it destroys employee morale.
Sure, the Fed has smoothed the way with its trillions of dollars of easy/free money, but the moral dilemma they have created should not be underestimated.
Many investors will be badly hurt when the market finally has a 10%-15% correction… let alone if a sharper down move develops, which is very plausible.
Regards,
Andy Krieger
Editor, Money Trends
P.S. We’re in unprecedented territory. In my 40 years of trading, I’ve never seen a stock market as mispriced as this one. The old rules of market action no longer apply. But it’s not too late to learn how to preserve and grow your wealth. If you didn’t heed the warning I sent in February… and you’re worried about where the market is going next… watch this.
