Here Comes the Second Wave

Last week, the Fed and the coronavirus teamed up to lob a couple shells over the bow of the SS Bull Market. 

On Wednesday, Fed Chief Jerome Powell gave a particularly dour assessment of the U.S. economy. In a nutshell, Powell said that getting ~38 million people back to work and returning the U.S. economy back to where it was is going to be a “long road.” Really though, that statement couldn’t have been much of a surprise.

After all, I expect many of us have gone to sit outside at a restaurant recently, as restrictions have been eased. The 50% capacity is a decent lure for us to feel the risks are worth it. Still, it’s easy to see the effect. There are ~660,000 restaurants in this country. As a group, they are the second-biggest source of employment after the U.S. government. It doesn’t take an economist to see that full recovery here is gonna take some time. And that’s just one area…

My local grocer still can’t get grits on the shelf. Very weird — I don’t know what the coronavirus has to do with breakfast grains except that we know that supply chains are being impacted. Here in Baltimore, sanitation workers at the east side recycling place came down with the virus, and all curbside pickup is now suspended for three weeks. You can gripe about how the lockdowns have been unfair and a threat to your freedom all you want: Asking that workers come in to face a potential infection that could kill them is a big ask. 

I read a DC United player tested positive for COVID-19, too. We’ve been looking forward to a resumption of sports. But you know what’s gonna happen: One player gets infected, symptoms don’t show for 14 days, boom, mass outbreak, teams go back into lockdown, too. I don’t see how this is avoided. I hope I’m wrong. I’d love to watch teams throwing any kind of ball around. But I’m getting very worried that I won’t get to defend my Angel Fantasy Football League crown — which will send me spiralling into a deep depression. 

COVID cases are spiking in several states that have started the reopening process. Both of my kids are ~2 months from college classes starting. My girl starts her junior year at Tulane, and she should be in her first apartment by then. But the boy is supposed to be in a University of Maryland dorm. What are the odds that one case in a crowded dorm starts an infection cascade and it all shuts down before we even get to October? I’d say the odds are high. 

The Second Wave 

Now recently, we’ve seen some darn good economic data. Two weeks ago, the economy actually added jobs, a feat that exactly zero people predicted. Manufacturing data has come in good, too. But let’s be very clear about the takeaway here…

Two things: One, anecdotal economic data tells us that the U.S. economy is incredibly dynamic. When the coast is clear, the U.S. economy will bounce back faster than many had thought possible. And clearly, the stock market knows this, hence the incredibly powerful rally off the March lows. But two… Yeah, the second thing is that the coast is not clear. And it may not be clear for a few months. This reality is just dawning on investors, hence the 1,800-point beatdown on the Dow Industrials last Thursday. 

Now, it’s all well and good to parse out these catalysts and how they are playing out. But I’m not gonna leave you with just that. Nope. I have more thoughts, specifically about what’s ahead and what you should do.

The most basic investment thesis right now should be this: There will be a vaccine; investors should use weakness to buy quality stocks that are not permanently impaired by the coronavirus. And, no, a vaccine does not mean a complete return to normal. The entire world has been plagued by too much production capacity for nearly 20 years. Here in the U.S. that is represented by retail. We have too much brick-and-mortar space. A vaccine does not fix that. Bankruptcy, store closings, and falling commercial rent does. 

Also, many businesses have just learned that “work from home” actually works. I can’t say to what degree commercial real estate is affected by this, but it will be affected. If you have exposure to real estate REITs, you might wanna think about ditching them. We didn’t have much real estate REIT exposure in my Wealth Advisory newsletter, but we did bail on a long-standing position: Realty Income Corporation (NYSE: O). We’ve had that stock for a decade, but I think that long-term trend has changed. 

Oil. If you’re a trader, great, oil stocks will still make big moves. But to me, they are off limits for long-term investing — at least until we see more bankruptcy proceedings from U.S. oil companies. 

Same goes for automobile stocks — the outlook for the Fords and GMs of the world is very uncertain, and Tesla is simply too expensive. Sure it could rally, so could Ford. The point is risk. You simply don’t have to wade into risk-infested waters.

There is opportunity in banks. Bank of America (NYSE: BAC) may have a quarter or two of weakness. It also has to rally ~50% to get back to old highs. And it will do that at some point. 

There is risk for commodity stocks as the global economy weakens. However, it is highly likely that infrastructure spending becomes part of stimulus plans in China and the U.S. I can see some upside for steel, copper, etc. Entry points will be important for these. 

Tech is the one sector that is really benefiting from the way that the coronavirus is accelerating trends. Just as the shutdowns are really putting the squeeze on retail, they are also a strong wind in many tech companies’ sails. 

Now, clearly, many tech stocks have priced in a lot of that bright future. Have you noticed that Microsoft is now vying for “biggest company in the world” at $1.4 trillion?? 

There’s one area of tech that I think is being overlooked: 5G. Yes, deployment is likely to be delayed, but it’s still gonna happen. And you can still get key players on the cheap. In fact, The Wealth Advisory’s #1 5G stock is currently under $9 despite a massive boost in next year’s earnings estimates. How massive? Well, a month ago, analysts were looking at a loss of $0.09 a share. Now they see a $0.28 profit. That’s about as big a swing as you’ll ever see. There’s more info right here.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.