Investment Thesis Forming Around 2021 Post-COVID Rebound

2020 has been, in a word, uneven. We had a broad selloff in March as the scope of a global pandemic was just beginning to be digested by the market. The initial disruptions of supply chains, the shortage of globally sourced inputs, and the general uncertainty over how bad it could get drove all manner of stocks down.

Then, some of those stocks turned out to be attached to businesses well placed to serve a lockdown world. These select few pandemic darlings shot up to new heights. More recently, a flurry of activity followed welcome news about vaccine development, damping some pandemic darlings and prompting bargain shopping in battered sectors.

What is emerging from all this is a rough investment thesis from market participants on how the 2021 post-COVID-19 rebound will look. We'll consider some of the aspects of this emerging investment outlook and discuss how it will likely shape positions going into 2021.

Energy and Industrials Will Recover

Energy stocks and industrials have had a tough pandemic. The demand destruction that came with lockdowns, extended work from home, and travel bans hurt all the sub-sectors within energy. The promise of a vaccine has the markets leaning toward a strong rebound in demand for energy in 2021 and a corresponding uptick in industrials as consumers and businesses move forward with purchases they deferred due to uncertainty about when the pandemic would actually end. 

We are already seeing commodity pricing in steel and oil start to recover. Hot-rolled coil steel futures were hovering around or under $500 in spring and summer but have jumped above $800 starting in November. Oil, as measured by West Texas Intermediate (WTI), has closed above $45 per barrel for several sessions, something it hasn't done since back in February.

Industrial and manufacturing stocks are, unsurprisingly, following their input commodities up. In this case, the bargain shopping period may be largely over as many of the tracking funds – the Industrial Select Sector SPDR Fund (XLI), for example – are sitting at or above where they were in February. So we are now waiting for the business activity to catch back up with the market activity.

Betting on Which Digital Habits Will Be Sticky

You could make a party game out of what has happened with some of the pandemic darlings in the tech sector. Name a stock that was trading at under $100 per share on Jan. 1 and over $500 per share by October. That would be Zoom Video Communications, Inc. (ZM). Tesla, Inc. (TSLA) would have also been a good guess, but it didn't close above $500 per share until November. To put this in perspective, Zoom is down over $100 per share from its peak and is still trading at more than five times its value in January.

A lot of tech companies made out well during the pandemic, including Amazon.com, Inc. (AMZN) and other stay-at-home stocks like Netflix, Inc. (NFLX). The market is betting that many of these habits, like getting more and more things delivered or spending more time indoors, will linger well into 2021 and beyond. The initial public offering (IPO) success of DoorDash Inc. (DASH) is a recent example of the market getting behind pandemic habits being hard to give up.

That said, companies like Zoom and Peloton Interactive, Inc. (PTON) were on a whole different level of pandemic success and have since seen the market start to cool on their post-COVID-19 prospects. The market is giving a weak signal that the group experience will prevail in a world where spin classes and in-person meetings are once again safe. Overall, investors are still debating which of our new digital habits will be sticky and which ones will be discarded once we can leave our houses with confidence to participate in the real thing.

The U.S. Dollar Will Lose Ground 

The U.S. dollar (USD) popped when the pandemic hit, thanks largely to its status as a safe haven. The dollar has declined significantly since March highs and, as measured by the U.S. dollar index (DXY), is now lower than it started off the year. These types of moves inevitably prompt think pieces about the end of the U.S. dollar as a haven and the global reserve currency. Time after time, however, we once again see investors turn to the USD when global markets get choppy, so it is hard to credit that the pandemic is going to be the final act of the dollar's prominence.

More likely, the U.S. dollar is being punished for a combination of reasons, including the country continuing to set COVID-19 infection records, the government moving closer to another massive stimulus package, and investors finding better returns elsewhere now that the end of the pandemic is just a matter of time. Depending on how strong the rebound is in the U.S. following COVID-19 and how other major countries deal with their pandemic spending burdens, the case could be made that the USD is already oversold at this point. 

The Bottom Line

Investors large and small have already started positioning their portfolio for a world with falling COVID-19 cases and widespread vaccination. Part of the investment thesis emerging in the market is a snapback for energy and industrials, a slowdown among pandemic darlings (with continued strength in some of the stickier providers), and a sliding U.S. dollar.

As with any investment thesis, some of what the market is signaling will come to pass, some will be dead wrong, and other parts will be right but at the wrong time. The fact remains that many investors are already switching out of defensive positions and preparing for a better year ahead. It remains to be seen whether this optimism will be rewarded or if pandemic issues will continue into 2021 for longer than is currently predicted.