What’s been interesting to observe in the media over the last couple of months has been the cries from long-term bears, each eager to outdo the other about the extent and level of their bearishness. In general, this hyper fear from the hyper bears has been on a reasonable basis.
What we’ve been witnessing over the last two months has largely been without precedent for almost the last hundred years. In that context, it’s reasonable to have a generally high level of fear and skepticism that things will eventually resolve themselves. This fear and skepticism were reflected in the massive declines seen in the S&P 500 (SPY) and Dow Jones Industrial average, where both of these indexes plummet to declines of greater than 30% from all-time highs.
No doubt, the prolonged shut down of the global economy in such a coordinated fashion was fairly unprecedented, and there were and, actually, still are major fears that significant short-term and potentially medium-term damages will be done to the global economy.
However, in spite of what the bears may think, global economies, consistently, have a track record of recovering from such a devastating health crisis. From The Spanish flu to SARS, Ebola, and MERS, history always shows that the world recovers from both the health and the economic impacts of near-term disruptions. A treatment or vaccine is found, implemented and things then resume their course.
Source: Charles Schwab
The COVID-19 looks to be following a similar path with a multitude of promising candidates identified including potential drugs like Gilead’s (GILD) Remdesivir, promising plasma therapies from consortiums involving the major plasma producers such as CSL (OTCPK:CSLLY) as well as other potential candidates. In all instances, while there is a period of limited disruption, history has shown the ability of economies and industries to be able to reset themselves and move forward.
Where the bears do have a point though is that there will be certain sectors and certain parts of the economy that the coronavirus will shut down and will do so for an extended period of time. The impact of this will be to accelerate the secular decline of malls and retailers which are already facing declining foot traffic. Highly leveraged mall REITs like Tanger (SKT) and others are already showing the signs of the strain. Certain discretionary retailers such as J. C. Penney (JCP) are at risk of collapse. The coronavirus may finish off what changing consumer trends started.
The impact on restaurants and QSR is also uncertain. The requirement for social distancing may only aggravate the hurt for premium concepts like Cheesecake (CAKE) that have protested that they can’t pay rent. There is likely real longer-term pain to come in the travel sector for businesses like United Airlines (UAL). Virus fearing consumers and business travelers are likely to put off any non-essential travel for an extended period, at least until they receive an all-clear or a vaccination emerges. The damage at this juncture is probably still not full quantified for these businesses.
There will be second-order, indirect impacts as well. These include businesses in the industrial complex like Ford (F) that will also struggle and that are very capital-intensive with high debt levels and poor credit quality. In this environment, the last thing on consumers’ minds is the purchase of large, big-ticket items. S&P, recently, downgraded Ford’s bond status to junk. While they should still survive, it is uncertain as to just how much damage will be inflicted on them on the way through.
However, what the decidedly negative analysis above misses is that for the sectors whose health is really questionable, there are many businesses and spaces that should survive and pull through. When one looks at the rush of demand at grocery stores, places like Costco (COST) and Walmart (WMT) will likely have experienced record sales, with panic buying and people stockpiling items, and whose progress will continue even post the crisis.
Consumer staples businesses such as Coca-Cola (KO), Colgate-Palmolive (CL) and Clorox (CLX) will have at least held their own through the ensuing chaos, if not strengthened their position given consistent robust consumer demand for their products. All are strongly capitalized, generate significant cash flow, and have good cash reserves on hand.
Finally, there will be stocks and sectors of the economy that will do better than just pull through. They will actually prosper and accelerate market shifts that have already been taking place at a slower rate under the hood. The shift from cash payments to digital payments, in-store commerce to electronic commerce, and the focus from on-premise solutions to the cloud are all trends that will no doubt accelerate as a result of the health care crisis and ensuing lockdowns that have been taking place.
Visa (V) and MasterCard (MA), which benefit from the shift to digital payments will likely see the benefits of increasing electronic payment usage even after the crisis is done. There has been a pronounced shift through these last few months toward electronic commerce with consumers stuck at home, and yet still needing to satisfy basic needs. Amazon (AMZN) and Alibaba (BABA), in particular, are benefiting from the trend to e-commerce and are having trouble filling basic demand.
If the e-commerce experience is good, these trends will persist and continue, and new users will continue to be engaged after the worst of this has passed. These aren’t stocks for which there are any questions of survival and these businesses haven’t been screaming distress as other sectors have tanked 70-80%. Amazon has actually been making new highs. These businesses that will survive and prosper are cash-rich and have balance sheet strength like Google (GOOG) or Facebook (FB) that have $115B and $55B in net cash respectively.
Mission-critical technology software businesses will hold their own in this environment, and some will likely prosper. CTOs are waking up to the need for enhanced cloud availability for workplace productivity and application access. No doubt Microsoft (MSFT) will see an upswing in the need and utilization of cloud-based Office365 and improving corporate communications access in a remote environment will see a strong surge in the direction of businesses like RingCentral (RNG). As a longer-term trend of employees working from home continues and greater external access to corporate networks are more prevalent, network and cybersecurity businesses such as Zscaler (NASDAQ:ZS) and Splunk (SPLK) will also be increasingly relevant.
For those businesses that don’t make it, the law of natural selection in global economies is pretty ruthless, they will be replaced by the survivors and the ones that do pull through. History has consistently shown that this is the case and just looking at broad global proxies of market health such as the S&P 500 over a long period of time confirms that this is the case. Economies have recovered, and stocks have continued to rise after paralyzing events such as the global financial crisis in 2008, the September 11 terrorist attacks, the dot-com bubble burst in 2000, and numerous world wars and other crises over the last century.
History of Dow Jones Industrial Average (wikipedia.com)
While health and economic crisis often feel overwhelming at the moment, and short-term market gyrations may be paralyzing, the continual progress of markets has been in one direction over the course of the last hundred years, and that is upward. It has historically never paid to be a long-term bear, and I would submit, this time, it’s no different.
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Disclosure: I am/we are long AMZN, V, MA, FB, GOOG, SPLK, ZS, RNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.