North American markets, viewed several hours before the opening, appear poised to prove again the ongoing volatility of the investment environment. While they had been expected to continue the mixed and negative trends at the end of the day on Friday, all major North American indicators are sharply in the green reacting to the announcement from AstraZeneca plc early this morning that its virus vaccine could be approximately 90% effective without serious side effects.
European markets are already open at time of writing and most major indicators there are in the green.
All of this counterpoints dramatically with the overwhelming surges in COVID 19 cases bringing with it fears of more hospital overcrowding and continued economic damage.
As the trading week begins, a major question to be faced is the strength of the buoyancy over major vaccine developments set against nervousness and fear about the implications of the frightening surges.
From the beginning of the crisis, the pandemic has had a mixed impact on investments in the retail sector. It has been damaging for retailers dealing in consumer discretionary products that are non-essential items such as clothing, cosmetics and electronic goods, explains Paul DeSisto, CFA, Executive Vice President and Managing Director at M&R Capital Management Inc. in Summit New Jersey. These are expected to show a 28% year-over-year decline in earnings per share in the latest quarter.
The news is much brighter in the consumer staples category which includes retailers dealing in the necessities of life such as groceries, other household supplies and automotive parts.
They are expected to grow quarterly earnings by 1%.
DeSisto suggests that while consumers have reduced spending in the discretionary category as stores, restaurants and malls are closed or operating for restricted hours, they will always buy the staples.
Meanwhile, the shopping restrictions of the pandemic have meant that consumers have saved funds that they would otherwise have spent. According to some reports, American savings accounts now contain $15.9 trillion, far above the $13.2 trillion of a year ago. This leads to the conclusion that consumers have saved large amounts of money that they would otherwise have spent over the last eight months.
“These savings are going to be spent,” DeSisto says.
DeSisto says that big box retailers such as WalMart and Target are well-positioned because they straddle both the staples and discretionary categories and are aggressively expanding their online services.
WalMart ranks as the largest food retailer in the United States and last Tuesday reported $1.34 per share in earnings compared with an estimated $1.18 per share.
DeSisto points out that WalMart is taking a page out of the Amazon Prime playbook by launching Walmart+. For $2 per week, customers get unlimited home delivery and a reduction of $0.05 cents per gallon of gas.
In a very unusual move, it is investing with the Oracle Corporation in a partnership with the American operation of TikTok, the short-form video-sharing app. “This is something Amazon doesn't have,” he says.
Moreover, Target’s deal with Ulta Beauty Inc., announced last week, strengthens its consumer discretionary product category. Target’s stock shot up on Wednesday after its third quarter results proved its ability to profit from the pandemic. It earned $2.79 per share.
The question that remains unanswered at time of writing is how much the re-imposition of COVID 19 shutdowns will affect the consumer discretionary sector, DeSisto says. Last week, various American states and Canadian provinces announced a variety of restrictions and at least some of them will hit retail operations in their areas.
The differences in investing between consumer staples and discretionary categories can seem mildly confusing, but in the bigger picture, what is shaping up is that the pandemic has affected investing strategies for at least the short and medium terms.
Still, implementing this or any other strategy speaks again to the need for detailed discussion between advisor and client. While increasing investments in consumer staples stocks such as those discussed here will be appropriate in many cases, the actual fit will vary between portfolios.
Perhaps your portfolio already has a substantial weighting in consumer staples with other big box companies. Alternatively, investing in one of the stocks discussed here may make it necessary to liquidate another holding and that may or may not be advisable.
And even given a large amount of available cash ii your portfolio, if your present employment situation is precarious due to the pandemic (or for any other reason) it could be advisable to keep a larger cash balance than otherwise and hold off on further investing. A professional advisor can act as a knowledgeable buffer in weighing up these factors.
Disclosure: While I periodically highlight the role of the financial advisor and the advisor’s contribution to an individual’s financial health in these columns, I am not now and have never been a licensed financial advisor looking to recruit new clients, (though I can appreciate that some might take that impression). As a journalist I have interviewed upwards of 300 licensed advisors in several countries over the years and believe that I understand what they bring to their clients.