While the S&P 500 index has hit an ATH record on August 18 trading day, beating the 3386.15 points of February 19, the rebound on financial markets of the economy appears quite unequal. The gap between winning and losing sectors of the Covid-19 crisis seems to widen significantly. It is obviously too early to draw potential conclusions of long-term trends of economic sectors, but an analysis of the post-crisis recovery remains interesting.
According to Bloomberg, the average stock in S&P 500 is 28% below its peak. This data at first sight seems to be contradictory with the S&P 500 recovery. It is mainly due to the index composition, whose evolution is strongly driven by big market capitalization companies, especially tech giants.
Stock sectors performance from February 19 to August 21
Sources: Bloomberg; Financial Times
GAFAM, an impressive recovery
The global economic downturn finally did not impact so much Google, Amazon, Facebook, Apple and Microsoft stock prices so far. While a significant drop threatened the five companies at mid-March, investors and traders have taken long positions on tech stocks, convinced of the capacity for recovery and resilience of the GAFAM. Since then, GAFAM stocks have regained all their losses quickly, even hitting and exceeding ATH levels in June. YTD performances as of August 28 are impressive: Google is up 19.8%, Apple 66.2%, Facebook 40%, Amazon 72.9% and Microsoft 42.5%.
Not only US big tech companies are fast-growing stocks during recovery period but seem to even become defensive stocks, with limited downside risks during recessions. Portfolio managers now consider tech stocks as a key component of their investment strategies, in various economic settings.
Other US sectors that outperform the S&P 500
Apart from communication services and information technology sectors supported by tech stocks, consumer discretionary stocks achieve a great performance, outperforming the benchmark index from 15.5%. This sector includes firms that sell non-essential goods and services like appliances or entertainment. Noticeable YTD stock rises are those of Home Depot, gaining 30.33% and eBay 50.92%. Of course, online sales volume has skyrocketed due to epidemic conditions, allowing consumer discretionary companies to boost their revenues. It also shows that consumption of households, at least from middle classes, is going back.
Health industry remains a defensive sector and pharmaceutical companies’ stocks have even outperformed the S&P 500 index since the peak of February (+2.6%). The materials sector also outperformed the benchmark index thanks to good performance of stocks such as Newmont mining (+54.4% YDT) or Sherwin-Williams (18.2% YTD).
FIG, Real estate and Energy sectors in the US: losers of Covid-19 economic crisis
Banking institutions have obviously suffered numerous credit defaults from companies and households (mortgage credits especially). Asset management and trading departments have cumulated losses, inducing disapprovals from investors on the banking industry (e.g. Warren Buffet). It confirms banks sensitive exposure to economic downturn, since 2008.
Real estate recovery is also quite low, compared to S&P 500 index. 2Q20 REIT earnings were negatively impacted by Covid-19, causing investors’ suspicions on real estate business. Several retail tenants went bankrupt in the past few months (Ascena, Tailored Brands, Lord & Taylor…) and mall occupancy is declining. This explains a very prudent recovery for real estate stocks.
The fall in oil prices due to unprecedented consumption decrease and overproduction (WTI futures ATL prices), is responsible for energy sectorial index underperformance. Oil groups have not regained their losses related to the crisis yet. As a consequence, YTD stock price change remains widely negative for Chevron (-29.5%), ExxonMobil (-42.6%) and BP (-45.1%).
Author: Alexis Bernet
Contact: alexis.bernet@hec.edu
Date: 28-Aug-2020