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Braeden Lichti: Market Sectors Doing Well in Uncertain Times

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VANCOUVER, British Columbia - PrZen -- Coronavirus upended the stock market in the first quarter of 2020, with losses of over 23% in the Dow Jones Industrial Average (DJIA), according to Barron's.  These losses resulted in the DJIA's worst quarter ever, affecting all 11 sectors of the market.  Yet, over the past few months, the market has rebounded, performing even better than before – giving rise to hopes that a V-shaped recovery is back.

Despite the volatility of the stock market, and its dramatic downturn in Q1, these fluctuations appear to have been temporary, especially as Wall Street gains enthusiasm regarding the economic reopening occurring worldwide.

Is it possible that the Coronavirus has actually helped the stock market rebound and overperform in most sectors?  Let's take a look at some of these market sectors and their current performance during the ongoing pandemic.

Overperforming Sectors

According to Fidelity, who has compiled a list of each sector and their performance in the past year, the Information Technology sector is the best performing of all 11 sectors, outperforming the S&P 500 index by threefold.  This excellent performance is likely due to the increase in internet infrastructure to accomplish day-to-day tasks amidst the COVID-19 pandemic, when working in large offices has been replaced by working from home.  Software such as Zoom teleconferencing can help companies stay productive despite mandatory physical distancing measures.

Fidelity reports that the second highest performing sector this year, which has also outperformed the S&P 500, is Communication Services which has grown by nearly 20% over the past year.  Communication services includes cellular and wireless providers, as well as media companies, all of which are in high demand with most large entertainment venues closed and with a high reliance on communication technologies to stay in touch at a time when physical presence can be dangerous and spread COVID-19.

In third place is Consumer Discretionary spending, followed by Health Care.  Consumer Discretionary spending refers to goods and services bought by consumers which are not essential, but bought if they possess sufficient income.  While this sector does include big-ticket, designer items, it also includes less expensive, simpler pleasures from companies such as Nike and Starbucks, as well as stores like TJ Maxx and Home Depot.  While times are tight economically with layoffs and furloughs, limiting consumer's disposable income, consumer discretionary stocks have actually outperformed the S&P 500 in recent months.

The Health Care sector includes companies in the health care industry, including biotech and pharmaceutical companies, health care providers and services, and health care equipment and supplies.  These industries, along with consumer staples, also nosedived in late March 2020, but have rebounded and are currently outperforming the S&P 500, according to Fidelity.

These four sectors – Information Technology, Communication Services, Consumer Discretionary, and Health Care -- are outperforming the S&P 500 over the past year, indicating that they are still going strong amidst all of the economic volatility.

In the short term, there are other sectors that have remained resilient despite economic happenings.  While underperforming the S&P 500 in the past year, Consumer Staples are always typically in high demand and have also grown by about 6% over the past year.  Consumer Staples, as their name indicates, are items such as food, beverages, and basic household products.  Consumer staples refer to products that are unlikely to decrease in demand as people see them as staples, or basic needs.  Consumer staples have performed well during the present pandemic as people are staying home, ordering groceries rather than going to restaurants, and buying household supplies such as hand sanitizer and cleaning products to help in the effort against the COVID-19 pandemic.

While consumer staples did take a nosedive at the end of Q1 along with the rest of the market, they have mostly rebounded.  For example, the T. Rowe Price Global Consumer Fund (MUTF: PGLOX), which was trading around $14 a share before the economic downturn, dropped to about $10.31 a share at the height of the downturn, but has rebounded to pre-COVID-19 levels.

Underperforming Sectors in the Time of COVID-19

The two underperforming industries which have struggled during the pandemic are Financials and Energy.

The Energy sector is made up of companies focused on the discovery and production of both oil and gas as well as renewable energy resources.  The energy sector has seen a decrease of nearly 25% over the past year.  COVID-19 has drastically affected the energy sector, particularly in the fossil fuels industry.  As the world came to a rapid halt, energy production, too, had to slow drastically.  Low energy demand coupled with a failure for OPEC to reach a deal further undid the sector, with oil prices dropping to below $20 a barrel, and causing problems for energy-dependent economies worldwide.  However, as a new normal emerges worldwide, these prices have increased and are returning to pre-COVID-19 levels.

Financials, of course, refers to banks and other companies that provide financial services (e.g., banking, consumer finance, mortgages, investment, etc.).  Financials are only down about 3% compared to this time last year, likely due to the financial problems occurring due to people laid off or furloughed who are not able to pay their bills and mortgages, and resulting from the economic slowdown due to the closure of non-essential businesses during the pandemic.

Conclusion

Despite the fact that the COVID-19 pandemic has turned the economy upside-down in the short term, there are signs that it is actually causing massive growth in certain sectors such as high-tech industries, health, and consumer spending.  As the world continues to shape its "new normal," all 11 sectors will continue to grow and expand, taking advantage of pent-up demand to continue to grow and thrive.

Contact
Braeden Lichti
***@theravestmanagement.com


Source: Braeden Lichti
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