Robert Zuccaro, CFA is Founder and CIO OfÂ Target QR StrategiesÂ managing the Golden Eagle Growth Strategy.
The Covid-19 pandemic has done more to alter business prospects than any recession since World War II. It has not only affected businesses, but also the habits of Americans. The chasm between the haves and have-nots in our society as a whole has grown wider than ever.
From a business standpoint, forced shelter-in-place restrictions have benefited e-commerce companies, such as Amazon, Target and Walmart, and sounded a near death knell for the likes of Hertz, JCPenney, Neiman Marcus and many others.
Stanford News reported in June that 42% of workers were working full-time from home. Businesses that have made this adjustment are finding that workers are more productive than when commuting to work, sometimes under stressful conditions. In turn, many businesses can now reduce fixed costs by shrinking their office footprint.
I think the pandemic is a seminal event with the potential to change society more than any political party can. There is widespread agreement that lifestyles will change permanently in some ways as a result of the pandemic. Already we are seeing a booming real estate market with people moving out of certain high-cost cities for the suburbs. The office footprint will likely change permanently because of sensitivity to social distancing, which will give rise to sprawling low-rise office centers in suburbia at the expense of city skyscrapers.
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These demographics will inevitably lead to greater income inequality. As economist Nicholas Bloom told Stanford News, “More educated, higher-earning employees are far more likely to work from home.” They are also far more mobile in living where they want to and in seeking better paying jobs than those who must work at a specific physical location. It should be pointed out, however, that income inequality is a worldwide problem and common to every one of the 37 countries that comprise the Organisation for Economic Co-operation and Development, which generates an estimated 80% of world trade.
What are the implications for the stock market? Today, the S&P 500 includes companies in the airline, car rental, department store, lodging and restaurant industries â€” some of which will disappear in coming years. Why would any investor choose to own an index with possible future fatalities?
The time-worn orientation toward diversification across a broad swath of industries should be discarded and replaced with an emphasis on investing in the technology sector, which as a whole has fared better than other sectors during the pandemic. In this regard, one way to do this may be to switch out of S&P 500 exchange-traded funds (ETFs) into the Nasdaq 100 ETF, symbol QQQ, or into internet ETFs, such as FDN and PNQI, that contain big tech stocks. Investors are generally better off investing in ETFs that mimic indexes than in individual stocks because the vast majority of professional fund managers have been unable to achieve success in picking stocks.
That being said, it’s important to take risk into consideration when investing heavily in any one sector. A deep slide in the overall stock market could disrupt the continuing ascension of the Nasdaq versus the S&P 500, the reason being that the stocks that go up the most go down the most in a severe market decline. However, bear markets occur roughly one in every four years and we just came through one earlier this year, so I believe the prospect of another slide in the next year is minimal.Â
Investors may be better served in adopting a market basket approach to investing given the poor record of mutual funds and equities hedge funds over time. The annual SPIVA report (S&P Indices Versus Active) shows that less than 13% of active fund managers have been able to beat the S&P Composite 1500 Index benchmark return over the past 15 years. The smart money will recognize what is coming down the pike and seize promising but unconventional opportunities by heavily emphasizing tech securities in their portfolios.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.