When Good News Is Bad News
Good news or bad news first?
Good news, we may be closer to a vaccine than expected.
Bad news, a vaccine won’t be good for all stocks. Those that gained the most from a shutdown may have the most to lose (👀We got our eyes on you, Zoom).
Cyclical stocks get the short end of the stick
Typically, cyclical stocks fall the most during a recession and recover the slowest. Cyclical stocks (e.g. automotive, construction, travel & leisure companies) are impacted the most by a fall in consumer spending during a recession.
Since these stocks drop the most, they also stand to gain the most. A report by Causeway Capital Management showed cyclical sectors outperforming non-cyclical sectors (e.g. technology) during the market recovery after the 2008 recession (between Oct 2007 and Feb 2009):
- Materials: Fell 60% between Oct 2007 and Feb 2009, gained 155% between Mar 2009 and April 2011
- Industrials: Fell 60% gained 131%
- Financials: Fell 71%, gained 126%
- Technology (non-cyclical): Fell 53%, gained 104%
Cyclical sectors are now showing signs of life
Not all cyclical sectors recover at the same time. The automotive and housing sector benefited from stronger than expected sales in June and July.
Strong housing demand in June sent the stock prices of construction companies higher – the iShares U.S. Home Construction ETF ($ITB), a basket of stocks relating to the US homebuilding industry, was up over 17% in the month of July. An increase in first time home buyers and strong housing demand benefited PulteGroup ($PHM), a major home construction company who reported strong earnings on July 23.
Automotive sales plunged an estimated 30% in sales in the second quarter of 2020. The industry is slowly seeing sales pick back up with the US economy recovering.
Not all cyclical stocks share the same fortune… On August 6, AMC theatres reported a 99% drop in revenue in their most recent quarter. Yikes.
Goldman Sachs warned that a successful vaccine could spark the redirection of cash into cyclical stocks and a sell-off in technology stocks and bonds.
What does this mean for you? Industries that have yet to recover could see a big recovery while companies that benefited from shutdowns could see the stock prices fall. Bill Callahan, investment strategist at Schroder Investment Management sees undervalued opportunities in travel, leisure, financials, and energy sectors as we get closer to a vaccine.
ETFs to watch: Financial Select Sector SPDR Fund ($XLF), Industrial Select Sector SPDR Fund ($XLI), Invesco Dynamic Leisure and Entertainment ETF ($PEJ)