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02 October 2020
The news that President Trump tested positive for the coronavirus rippled through Wall Street and the country on Friday, and it left investors wondering how the development would impact their portfolios.
I believe the most important takeaway is this: The news underscores the fact that the pandemic is going strong. If even the president of the United States can be infected, then we are far from being out of the woods. And I believe that has two implications for the stock market.
First, so-called stay-at-home stocks should benefit. The president's positive test underscores that we're dealing with a highly contagious airborne disease, and with the timeline of a vaccine unclear, social distancing will remain a key line of defense. A widely predicted second wave of infections in the fall would only strengthen the case for social distancing, while sending many students and workers home.
What kinds of companies might thrive in this stay-at-home world? The kind that we at Copeland Wealth Management have been gravitating to for most of the year: technology firms, with an emphasis on those that specialize in connectivity, cloud storage and virtual connection. Retailers including the big-box home improvement chains are also well positioned as stuck-at-home consumers look to feather their nests.
The president's diagnosis may also improve the odds that we get a second round of stimulus relief from Congress. Politically, it's suddenly become much harder to ignore the impact of the virus and the need to respond.
On the other side of this coin, I would warn investors about falling into value traps. Stocks in the restaurant and hospitality, airline and cruise industries are really attractive in many cases. But these companies tend to be loaded with debt, and their revenue prospects are dim. With health restrictions such as limited capacity in place, it's hard to see how they can generate the sales that would translate into attractive earnings.
Remember, not only is it unclear when we will have a vaccine, it's also uncertain how effective it will be, how quickly it will be distributed, and what percentage of people will take it. Consumers have been frightened for a long time, and even after airlines, cruise lines, restaurants and stores open at full capacity, there's no telling how long it will take regular people to start patronizing them at pre-pandemic levels.
In September, we saw investors start to sell stay-at-home stocks, which had become expensive, and move toward undervalued stocks. President Trump's diagnosis is likely to reverse that trend. Please don't hesitate to contact us If you'd like to discuss building an investment portfolio for the pandemic era.