Covid-19 containment brought businesses to a standstill for weeks across the globe, killing off some companies and sending many others to the brink of collapse. Economic activity remains subdued as countries slowly ease restrictions. Companies listed on US stock markets appear to be pricing in a relatively easy bounce-back. But, as The Wall Street Journal reporters note, the stock market is sending a contradictory signal, with both winners and losers from Covid-19 perking up in value. Bulls ought to be wary, they say, explaining why there must be factors at play other than the prospects of future business performance for US stocks. – Jackie Cameron
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Lockdown winners and losers shouldn’t both be rallying
(The Wall Street Journal) – How much longer will the Covid-19 crisis hamper the global economy? The stock market is giving investors a confusing answer.
As the extent of the pandemic became clear in February and March, the winners and losers predictably moved in opposite directions: companies that depend on the ability to travel or assemble for large gatherings watched their share prices crater while the “stay at home” trade flourished.
Work-from-home equipment providers, telemedicine companies, cleaning-supply manufacturers and food-delivery businesses were among those winners. Drug companies of all sizes that announced new research into Covid-19 therapeutic or vaccine candidates also watched their market values swell as those that relied on postponed elective procedures suffered.
Lately, though, the laggards have had a roaring comeback as states begin to reopen and investors bet the worst of the economic fallout is in the rear-view mirror. A broad index of medical-device stocks has rallied more than 40% since late March as hospitals begin to reopen for routine care. Marriott International shares have gained 60% since early April, while Live Nation Entertainment is up about 50%. Online sports betting startup DraftKings shares have more than tripled since mid-March.
That rebound could still make sense even if nightlife and recreation haven’t picked up in earnest. After all, a single lousy year should have a modest impact on most Wall Street valuation models that rely on discounting cash flows. And since markets are forward-looking by nature, stock prices ought to rally before business prospects begin to improve meaningfully.
But stocks that benefit from consumers staying home also should be valued on a longer-term basis, and their prices imply a bet that life won’t be normal for a long time. Zoom Video Communications was trading at an all-time high before Tuesday afternoon’s results and had nearly doubled since April. Delivery chains such as Domino’s Pizza and Papa John’s International are trading near record or multiyear highs. Peloton Interactive stock has nearly tripled since March.
However soon life actually returns to normal, one undeniable effect of the pandemic is that it has taken a big chunk out of economic activity on which the broad stock market’s value is based both domestically and abroad. With prices already fairly rich before the pandemic and having made up so much of their losses from February and March, it seems reasonable to conclude that stocks are trading on factors other than changes in underlying business prospects.
Markets rising sharply without any obvious rhyme or reason should give stock bulls pause.
– Write to Charley Grant at [email protected]
