We Don’t Know How Far Revenge Spending Will Go

Yesterday’s trading proved again the volatility of the markets, as several high-flyers dropped enough to have some investors reaching for Tylenol or something stronger. Tesla Inc. dropped $44.64 or 5.2% to close at $804.82. Amazon.com dropped $18.42 or 0.56% to close at $3286.58 while other tech names had less dramatic drops.

Whether these drops intimate a change in the market leadership of tech stocks remains to be seen in weeks to come but the possibility deserves consideration.                                   

The near-term outlook is mixed, according to a London-based analyst. The rally has slowed but still has strength and room to run, according to Chris Beauchamp, Chief Market Analyst at IG Group, a London stock firm.

“The February rally has finally run into some tougher ground, with European markets on the slide after a week of gains that has, for the most part, put the global equity market back on an upward path,” he says.

Still, there are some economic reassurances for at least the near term.

“The strength of this equity rally continues to take everyone by surprise, but earnings season has delivered enough good news to hold stocks near their current high levels,” he says, adding that with the impending stimulus investors appear willing to stick with equities.

At the same time, Federal Reserve Chairman Jerome Powell reassured markets that interest rates will remain low to spur the economy and jobs growth. Low interest rates have been a major driver of markets and that clearly will continue for the near term.

The markets also seem to be taking some comfort from the China picture. “While the Western world continues to struggle, the economic recovery is already in play across parts of Asia. That provides a hint of what might happen in due course elsewhere once the vaccination programmes have really taken hold.

In a different China trend, the administration of President Joe Biden is reviewing the relationship between the two countries and to date has taken a less strident tone than was the case with former President Donald Trump. TheTikTok transaction sale/partnership to Oracle and Walmart will remain on hold in the meantime.

That has implications for investments in Chinse companies listed in the U. S. and   a general uneasiness in some quarters about investing in them.

In another trend, social conscience met volatility. Executive behavior and the treatment of employees has been under scrutiny in recent years, a development that a Reuters report attributes to the #MeToo social media movement. On Tuesday, Eli Lilly and Company announced the resignation of its Chief Financial Officer after allegations about a personal relationship, ‘inappropriate personal communication’ and an investigation. Eli Lilly stock dopped $4.06 to close at $201.71. It had risen 40% between over the 12 months preceding Monday, according to the Reuters report.

On Wednesday it appeared to resume its upward trajectory and closed at $204.48. However, that was boosted by the expanded approval it received from the U. S. Food and Drug administration for its combination cocktail of bamlanivimab and etesevimab, which cuts the risk of hospitalization and death in COVID-19 patients by 70% according to data.

A trend that can be anticipated but where the extent is impossible to project is a move to revenge spending – or put more formally – retail therapy. This refers to the expectation that consumers will unleash more than their usual spending during a recovery to make up for having been restricted during the height of the pandemic. 

If that trend does take shape, there may be a kind of Trojan horse hidden in it. “I think everyone has plans about what they will do when the world opens back up,” says Jay Nash, Senior Vice President at National Bank Financial in London. However, inflation could result from increased demand. 

“What happens when everyone tries to implement these plans at the same time? What will it to do availability or pricing? Was the price of a Super Bowl ticket a foreshadowing of what it will mean to attend live events?” he asks. 

Still, with current high valuations it seems impossible to estimate how much of this expectation is already priced into consumer stocks. “The challenge is establishing how much is priced in….and if this market will continue to be strong right through the re-opening process,” he says.

That leads to a major question with which analysts, advisors, investors – and even journalists – will have to grapple in the coming months; What is the best way to invest for the recovery as it takes shape? Will it be more profitable to focus on fallen angels – that is look for a rebound in stocks that have gotten beaten down-- such as airlines? They will likely be dependent on revived consumer demand as cost-cutting and videoconferencing make it appear unlikely that business travel will recover to pre-pandemic levels.

“Being early to return to investments in travel, hospitality, commercial or retail real estate; or energy can be painful if you’re watching everything else keep going higher,” Nash says. “But there is a point where the relative valuations are so far apart that the opportunity can no longer be ignored, and wise investor begins to make changes.”

Alternatively, would it be more profitable to stick with proven winners such as technology stocks, especially those well positioned to continue taking advantage of the ‘new world’ of retail?

Or both?

It’s too soon to answer this one, but it merits consideration as the recovery slowly takes shape.

“One challenge for investors is establishing how much is already priced in….and if these equity markets can continue to be strong right through the re-opening process,” he says. 

We do not know how long a “return to normal” will take, nor the actual shape of the ‘new normal’. 

Internationally, we do not know the extent to which countries will recover in sync with each other. Domestically, the pandemic has not impacted investors equally. Some have seen their livelihood disappear and been forced to use their savings to survive.

But many, if North American statistics are to be believed, are saving at historically high levels. This would suggest that the level of spending going toward this future “retail therapy” could be very high and price sensitivity may be lower than we have seen in many years. Such pressure mixed with an unhealthy fear of missing out (FOMO) could result in much higher inflation. 

“Many equity markets continue to reach highs daily. Let’s think of current trends as a wave in the ocean that hasn’t crested yet.,” Nash says. 

The wave will crest eventually. Let’s work on having plans in place for when the time comes. Possibilities include reducing portfolio volatility while staying invested in the market, non-stock assets such as gold, land, fine arts or setting up a  small business.

Disclosure: I do not own any shares in any company mentioned in this column.

Related: Investors: There Is a Fine Line Between FOMO and ‘Fad’