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Economy: Quarantine or Rebound?

The "Irrational Exuberance" which markets were showing got taken out little bit during usual "June Swoon". Now what? It all depends on if Economy is going back to "Quarantine" mode or continuing its path to "Rebound". Let's look at some factors which would decide this.

  • Trajectory of COVID-19: Various states (Texas, Florida, California, Arizona etc) have shown increase in infections and positive test ratios. Part of it is due to increased testing,  relaxed norms as well as opening of bars, restaurants and public places. Many nations especially in Asia (India) and Latin America (Brazil) have shown significant pickup in infections. Even China had shown outbreaks in some clusters.
  • Hospitalizations and Death Rates: While infections have increased, rate of hospitalizations is lower than infections and mortality rates have also improved due to increased understanding on how to treat COVID patients. Hospitals and health care system is much better prepared than in March/Apr. 
  • Progress of Vaccine: Over 100 trials are in progress to find the vaccine at war-footing. Some of the leading trials (by Moderna) are expected to start phase 3 as early as next month
  • Fiscal and Monetary Stimulus: Almost all central banks (US FED being the most proactive and innovative) have come up with various schemes to support economy. Many  governments have also opened up their wallets to spend without worrying about fiscal deficits. Even Germany which has always been very conservative is discussing and supporting EU wide fiscal stimulus. Despite political differences, US will end up having another trillion $ stimulus package done next month.
  • Employment: In US nearly 1/3 of working population has filed unemployment claims in last 3 months. While there was some positive news in May employment report due to PPP program, the cliff is coming. Unless US government comes up with another stimulus to help small businesses, we will see unemployment spike up in summer and fall.
  • Health of Corporates: Q2 will be over next week and earnings season will start in 2 weeks. Almost no one is in position to predict how earnings would come out and what's in store for future. Everyone knows that 2020 is going to be wash when it comes to earnings. It would all depend on would normalcy return in 2021? Corporates have been prudent to raise billions during Apr/May rebound. Even airlines and cruise companies raised billions to navigate next few months to survive and see 2021.
So many factors are at play if economy will go into "Quarantine" or "Rebound". As investor, one has to decide which path economy will take and make selective investment. Here are some ideas for both groups. (Caveat: You need to decide yourself what camp you fall into and do your own due-diligence before investing)

Quarantine:
  • WFH: Zoom, Cloud ETF (CLOU), Security ETF (IHAK/BUG/CIBR)
  • Retail: Amazon, Walmart, Costco
  • Entertainment: Netflix, Spotify, Peloton
  • Food: Chipotle, McDonalds, Starbucks
  • Vaccine/Cure: Moderna, Gilead, Translate Bio, Sanofi
Rebound:
  • Retail: Simon Property Group, Macy's, SL Green 
  • Entertainment: Dave&Busters, Disney
  • Travel: Southwest Airlines, Expedia, Norwegian Cruise
  • Energy: XLE (ETF), XES (ETF), XOP (ETF)
  • Banks: Wells Fargo, Citibank, KBE (ETF)
If one cannot decide which way economy will go, do monthly recurring investments in SPY (S&P ETF), MDY (Midcap ETF) and IWM (Small-cap ETF). Keep your investing simple and enjoy the summer - Either in your own backyard or outdoors by following all social distancing norms and 
wear the mask and help save lives!

/Shyam

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