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Investing During a K-shaped Recovery

September 25, 2020

COVID-19. A Tale of Two Cities

In Greater Boston, six months into the pandemic, the essential workers living in the more densely populated areas of the city continue to land on the state’s high-risk list for contracting COVID-19. The blue-collar city of Chelsea has the state’s highest total infection rate and now, as of 9/11/2020, reports the highest average daily case rate per 100,000 residents since late *July. That’s because most of the city’s residents live, commute, and work in very crowded conditions. Social distancing, proper PPE use, and air circulation are not ideal.

Thirteen cities and towns are listed in the Massachusetts “COVID-19 red zone”, at this writing. These are areas where a dozen people may live in a single apartment, they rely on public transportation and they don’t have the types of jobs where working remotely is an option – the trifecta for high risk of virus contagion. Of course, along with the risk of contracting the virus and becoming seriously ill, those in the poorer, working class towns have a higher risk of economic hardship as the virus affects blue-collar jobs and incomes disproportionately. According to McKinsey Research, up to one-third of US jobs may be vulnerable to the effects of the virus—and more than 80 percent are held by low-income workers.

Contrast that with the stories from across the coast of the wealthy investor class in Los Angeles. While the less “well-heeled” hunker down and take the brunt of the damage, the world of the wealthy is, well, a different world. Despite the coronavirus continuing to kill 1,000 people a day in the U.S. and unemployment having reached its highest in decades, billionaires are partying on yachts, traveling around the world on private jets, and buying citizenship in “safe” countries. The rich have become richer as billionaires have become 10% wealthier† during the COVID-19 crisis — and they’re starting to live in a universe parallel to that of the working class.

And it’s not just the millionaires and billionaires that have fared much better than the blue-collar worker. Much of the “professional” class that work in technology, online retail and software services, those who are able to work remotely, have been doing just as well if not better during the pandemic.

“K” Marks the Recovery

The pandemic’s economic impact on industries and workers has further bifurcated the haves and the have nots. Many economists and analysts are now considering the longer term possibility of a “K” shaped recovery, one that will accelerate for some sectors while others remain in freefall.

U.S. Chamber of Commerce 09/03/2020

Before the pullback in early September, the S&P 500 and the Nasdaq hit record highs, erasing losses caused by the coronavirus pandemic. Yet most of the companies in those indexes have yet to fully participate in the new bull run.

In fact, just a relative few of the market’s biggest tech names like Apple and Amazon have driven the recovery. The majority of companies in the indexes have yet to fully recover.

The average stock in the S&P 500 index was 28.4 percent below its peak, according to research group Cornerstone Macro. The spread between stocks that have recovered, and those that have languished has been dubbed the K-shaped recovery.

What’s this mean for investors and traders? On the bright side, and perhaps in fits and starts, we may see tech companies and some parts of the retail segment prosper. Names related to work, education, and health, may continue an upward trajectory. 

An ability to facilitate productivity in a partial shutdown economy is selling at a premium. Technologies, services and products that support remote work, learning, and telemedicine may outperform. Most analysts agree that the work-from-home economy is a secular idea, not a short-term trend. Companies that ensure the distribution of food, supplies, and medicine may also thrive. The high side of the K-shaped recovery is evident in employment numbers. The financial services sector, has already recovered 94% of its pre-pandemic employment according to the Bureau of Labor & Statistics. 

On the more disturbing side, the lower leg of the “K” leads to more sober thoughts. Leisure and entertainment sectors have only brought back 74% of its workforce. For the travel, entertainment, leisure, hospitality, and food service industries, the light at the end of the tunnel appears dim and in the distance.

It will be a long road back to full strength, and some companies will not survive at all. There’s only so long you can last with persistently lacking revenues. Before there’s a vaccine, and as long as social distancing and public health restrictions are in place, the lower leg of the K will keep getting longer.

*Source: MCAD COVID-19 Information & Resource Center.

†Reuters: 4/23/2020. Net worth of America’s billionaires surges during coronavirus pandemic.

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