Two weeks ago my oldest daughter texted me a link to a blog post she found on Linked In. The thesis of the post was “COVID changed everything forever.” Her text attached to the link was “This makes me sad.”
I read the lengthy post, which listed about 20 features of daily life that would never be the same. Everything from employment interviews to sporting events. I pondered the blogger's logic for a bit, formed my conclusion and texted her back, “Overly dramatic.”
The COVID crisis has, of course, changed just about everything for a while and is likely to change some things forever, but it is very unlikely to change everything forever. Human beings are creatures of habit, and while some new habits have certainly been created by the crisis, I believe many stronger habits are lying dormant, waiting patiently to quickly reassert themselves at the right moment, and the right moment is closer than further away at this point.
For now, however, the COVID crisis continues to define most facets of the economy and financial markets. So, in my traditional end of year column, I will attempt to look forward, through the crisis, to form some investment themes for 2021.
In my opinion, COVID has given most corporations a “pass” on earnings performance for 2020. Sales and profit models were literally broken by the pandemic. In this absence of valid earnings data and expectations, stock values have been able to decouple from earnings data. The investor response to this decoupling could have gone one of two directions, clearly at this time, however, investors have decided to be emboldened by this lack of earnings accountability and trade stocks higher.
This is one of the COVID trends that can continue for a while but will not continue forever. At some point, I expect in the second half of 2021, earnings and stock valuations will begin to come back into focus. When the COVID earnings band aid is torn off, what lies beneath may validate stock prices, but if stock prices continue to rise at the current pace, I believe the likelihood of this positive validation becomes less likely. When will this occur? I have no idea, but I expect it to be right about the time we begin thinking it,s not going to happen because this bull market “is different.” Hint: it never is; watch margin debt levels as an indicator on timing.
One of the “changed forever” items in the blog my daughter sent me was the nature of work. The blogger felt strongly that virtual and work-at-home were going to be the new normal. Well, this is one area we definitely do not agree, and an area where a rare contrarian investment theme may present some opportunity.
“Work at home” works for some jobs and some employees, but it doesn’t work for all. As long as investors are giving a pass to earning performance, and as long as customers are being patient due to the pandemic, this trend can continue. I will wager, however, as vaccines become available, as soon as investors begin grumbling about profits and customers begin complaining about service, work-at-home will land quickly in the cross hairs. When it does, reimagined work places will come back into vogue. How and when this occurs is beyond my crystal ball, but I do think commercial real estate could offer a rare chance to “buy low” in an overvalued financial world. Hint: publicly traded REITs offer distinctive risks and opportunities, but some pay healthy dividends while we wait for real estate to reassume its traditional role in society.
COVID-19 has been the most complicated disaster of my lifetime. Beyond the health crisis, the pandemic has impacted us economically, socially and politically. At its core, however, the pandemic most closely resembles a wide scale natural disaster. As the planet’s ultimate survivors, human beings find a way to thrive through whatever nature throws at us. 2020 was a year of survival, I hope 2021 will be year where we return to thriving.
I, for one, am ready. Happy New Year.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
