COVID-19 Impact: Consumers
How Will the New Normal Affect Spending?
The effects of the coronavirus, which began in Wuhan China in January, have reverberated throughout the world. Different regions are starting to lift social restrictions and are looking to restart their economies. Besides the devastating impact on human life, the lockdowns put in place to slow the spread of the virus have had a destructive effect on equity markets and economic activity.
And while equities have rebounded from their March lows, the long-term consequences of the virus and the remedies to try and stop its spread remain unseen.
Economic Toll
The pandemic’s devastating impact includes record unemployment figures. In the U.S., the country with the most confirmed cases and deaths, unemployment numbers have reached their highest level since World War II. The total number of Americans receiving unemployment soared to 22 million by the end of April.
Along with employment, consumer confidence has taken a nosedive. Consumer confidence can indicate future household consumption and savings. An indicator above 100 signals consumers have increased confidence in the future economic situation over the next 12 months, while values below 100 highlight a pessimistic attitude. The below chart shows consumer confidence during the Great Recession through the end of March.
U.S. Consumer Confidence Index
Great Recession Through March 2020
As expected, U.S. consumer confidence followed a downward trajectory from earlier this year as news of the virus spread, breaking the upward momentum that had been building since 2011.
The severity and speed of this event sets it apart from earlier recessions, such as the Great Recession, which started in December 2007 and lasted through June 2009. Prior to the Great Recession, the indicator was at 100 (July 2007), and then began falling, hitting a low of 96.7 in November 2008. The index stayed at 96.7 for several months before starting to climb again in March 2009. In comparison, consumer confidence started 2020 at 101.5 and dropped precipitously to 98.6 in just three months.
Additionally, U.S. gross domestic product (GDP) contracted by 4.8% during the first quarter, ending the longest economic expansion in history. GDP is expected to shrink further in Q2, with many economists predicting a double-digit slump.
Growing Shift Between Winners & Losers
With consumer confidence dwindling and GDP shrinking, it is surprising to see stock market gains. However, despite gains seen in April and early May, all sectors within the S&P 500 Index remained in negative territory year to date, except for the technology sector.
Energy continues to be the worst performer, suffering from the double shock of a glut in supply and sharply reduced demand. Market gains are not evenly distributed, as seen in the below chart.
In fact, the impetus behind the stock market’s rise has been driven by the FAANG stocks (Facebook, Alphabet (formerly Google) Amazon, Apple, Netflix) and the markets that these companies represent. These companies comprise nearly 28% of the S&P 500. If we look at the chart below, equity gains are being driven by only a few subsectors.
What Will the Reopening Look Like, and Who Will Benefit?
The broad trend in U.S. prices was negative in April, as the Consumer Price Index fell by 0.8% from March, the most significant one-month decline since 2008. However, prices for grocery essentials rose 2.6%, the largest monthly jump since 1974, as Americans stocked their pantries amid government lockdowns. According to the Labor Department, the price of meats, poultry, fish, and eggs climbed 4.3%, while cereal and bakery items rose 2.9%.
With less disposable money, and higher prices for essentials, what will be the impact on consumer spending? What industries will be able to not only weather the storm but also come out ahead?
If we look at the Great Recession for guidance, there were only 34 stocks in the S&P 500 that had positive returns, and during that time the benchmark fell 36%. What were some of the industries that withstood the negative impact of the last recession?
Discount Retailers. One industry that rose in the Great Recession period was discount retailers. With less disposable income, consumers are more likely to head to lower-price stores to buy cheaper alternatives.
DIY & Repairs. During a recession, consumers are more likely to try and repair an existing item than buy a new one. Companies that provide the goods for consumers to repair everything from home appliances to automobiles to DIY projects enjoyed strong performance during the last downturn.
Alcohol & Tobacco. The “sin” industries stand to benefit as people look for comforts but can’t afford to spend a lot of money.
A Different Type of Recession
The economic toll of COVID-19 is different from past recessions. How will the change in consumer habits affect the industries that serve them? How will the tremendous amount of stimulus provided by the US government impact the recovery? The below chart shows how individual preferences for traditional leisure activities have been altered.
Percentage of U.S. respondents likely to avoid the following even after COVID-19 restrictions are lifted
Many unknowns still exist regarding the transmission and spread of the virus, altering consumer behavior for the near future. Traditional consumer outlets are no longer feasible. For example, during the last recession, movie ticket sales went up.
In January 2009, gross box office sales reached $1 billion, one of the best January figures in history. With fears of transmission abound, the majority of consumers recently surveyed indicated that they would avoid movie theaters, according to Statista.
Amid this shift in consumer preferences, what industries will stand to benefit?
Online Retail. The pandemic has helped online shopping, and further hurt brick and mortar stores. US e-commerce jumped 49% in April, triggered by at-home sales due to coronavirus lockdowns. As the unknowns surrounding the spread of the disease remain, the future looks healthy for those companies that can market their goods and services online and provide home delivery.
Social Media & Social Media Advertising. Social media usage has seen a tremendous uptick with stay-at-home orders, and with it social media advertising. Increased social media usage benefits not only the social media companies but also smaller retailers that don’t have an online presence.
Streaming and At-Home Entertainment. Media consumption habits have changed. Most Americans wouldn’t feel comfortable returning to movie theaters, and sporting and live events have been postponed indefinitely. These changes are providing a further boost to at home entertainment and streaming services throughout the summer.
Businesses Reimagined
It is said that necessity is the mother of invention. Apple and Tesla are working on individual face shields, and construction companies are working on plexi glass partitions for restaurants. Other firms are marketing high-tech disinfecting devices. During this dramatically different time, what other new products and services will surface and be the winners of the new normal?
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
