Mr. Market has Already Prophesied How the Post-Covid World Will Look Like
The market knows it all, and it has prepared itself for the post-Covid world using millions of data points, Have you?
“In life, unlike chess, the game continues after checkmate”-Isaac Asimov.
Coronavirus took everyone by surprise, and it seemed the end of the world and of the human race, which was next to checkmate in Chess. However, life must go on, and after analyzing 30Mn.+ data points across 35 years ranging from Dow jones index to sectors to individual companies for price movements, financial results, news, management guidance, etc., Mr. Market has a clearer idea of how the post-Covid world is going to shape.
If Mr. Market is to be believed, below is a summary of the new normal based on stock performances, i.e., prices on the 1st week of January vs. last week of September in 2020. To give a perspective on the quantum of price changes, Warren Buffet has a CAGR return of 19.1%, and Dow Jones has a CAGR of 5.1%. Savings accounts in the US and India provide an interest rate of ~2% and ~5%, respectively.
- People will wake up and go for a run in their athletic clothes-Lululemon(+32%) or Nike(+28%) using Apple Watch(+54%) while tuning to Spotify(+16%)
- They would be getting ready for WFH in comfortable clothes, No Levi Strauss(-29%) or Guess(-48%)
- Since they are not traveling for work, less oil consumption from British Petroleum(-52%) and Schlumberger(-39%). Also, there are fewer carpools from Lyft(-38%).
- They would fire up their workstations using more Wifi, Cable One(+25%), and less mobile network, AT&T(-23%). Faster processing is of utmost importance, which will benefit chip manufacturers such as Nvidia(+125%) and AMD(+68%). Since the storage and computing would be on servers, external memory drives such as Seagate(-16%) and Western Digital(-43%) would slim down in importance.
- They will join their Zoom calls(+670%) using Logitech Webcam(+62%) and will invest in Home improvements/Furniture using Wayfair(+212%) & Lowe’s (+39%). No wonder we are living in Zoom Economy.
- Companies will engage Cloud-based information security companies ,e.g Zscaler(+197%),DocuSign(+183%) & Okta(+82%)
- With increasing data size, Cloud-based data companies like Mongo DB(+72%), AWS, and financial data providers such as S&P Global(+31%) and Moody(+20%) will thrive.
- To prevent the social gathering, the majority of customer demands would be fulfilled from e-commerce companies such as Amazon-Everything Store(+66%), Wayfair-Furniture(+212%), Etsy- Personalised items(+169%), and Chewy- Dog Food(+85%). 12 out of 13 listed e-commerce has grown in a pandemic with a median growth of 105% and the highest growth in Overstock(+932%) and Wayfair(212%).
- People will prefer fashion shopping at home and visit less of departmental stores like Macy’s(-64%), Nordstrom(-69%), and Kohl’s(-61%).
- Since offices are closed and less of urban focussed development, Real estate companies such as EPR Properties(-58.5%), Kimco Realty(-41%), etc. will take a huge hit
- Since small businesses are migrating online, companies serving B2B customers such as Shopify(+151%), Wix(+99%), and Salesforce(+51%) will see a huge demand shift in their favor. Also, since it is an ecosystem change, end-to-end integration would need seamless payment infrastructure, i.e. rise of Paypal(+88%), Square(+155%), etc.
- For Covid symptoms identification, Teladoc(+163%) and Veeva(+96%) would rise to the occasion. Biotech research companies, Novavax(+2313%), Seres Therapeutics (+745%) with a shot to Covid vaccine have seen a meteoric rise in their valuation.
- Netflix(+52%) would become a de-facto entertainment source with a major blow to theatres such as Imax(-41%) and WWE(-36%).
- People will restrict to in-home entertainment i.e Gaming on Sea Limited(+284%),Gravity Co.(+269%), Playstation etc
- For holidays, people will prefer to stay put, leading to a sharp drop in airlines, hotels, cruise, Theme parks, and gambling stocks.
- Downturn and Zero FED interest rates would lead to a sharp drop in banks valuation due to drying up of their major revenue source
Every coin has 2 sides and with the world order changing, there have been clear winners and losers as identified objectively by Mr. Market. Covid-19 has been an opportunity for some and disaster for others, e.g 9.1% of 2k+ US-listed companies(Valuation of $1Bn.+) had price change of >50% while 5% of companies saw its stock prices slashed by >60%.
The choppiness in Dow Jones in 2020 is evident by market performances across the past 35 years. The below chart represents the Dow Jones index movement on 1st vs Last trading day of the year and compares against the average daily volatility. 2020 has been 3rd most fluctuating year in history after 2002 and 2008 i.e 2020 witnessed an average 1.1% up/down every day in Dow Index. However, to an outsider, the overall market is stable i.e Dow started the year at 28,868 and ended Q3 at 27,781 which ignores the storm brewing within, and during the course of this article, we will explore who is sailing against the wind. Random walks by Mr. Market also represent its inability to decide its movement trajectory who is confused with #Covid cases, Fed rates, Vaccine announcements, Stimulus checks, presidential elections, etc.
Imagine someone, let’s say Mr. Time Traveller went to space at the end of 2019 and returned to an exciting new decade all charged up and buzzing with energy. On his way back, he met Mr. Market a.k.a Dow Jones, and wanted to catch up on events that have happened in 2020 and understand Mr. Market’s vision about the future.
Mr. Time Traveller: Hello, Mr. Market, Howdy!Whats happening on planet earth?
Mr. Market: 2020 has been all about a novel Coronavirus which originated somewhere in china. It is a respiratory contagious disease with ongoing research for vaccine. It has changed the entire course of human mankind where tech adoption has been accelerated, oil crisis and pollution is under control and remote collaboration is possible at a scale never witnessed before
Mr. Time Traveller: This is unbelievably huge, May I know the source and depth of your knowledge?
Mr. Market: I have 35 years data of dow jones and stock market data for every day for 4000 stocks i.e 4000*365*35years, Financial performances and news about every company. Feel free to ask follow up questions
Mr. Time Traveller: Wow thats some big data at your disposal. Can you give me an executive overview of major changes due to this pandemic?
Mr. Market:Pre-Covid, Energy and Financial Services used to account for 7.7% of Market share which has dropped to 6.3%(-18%) implying that people are using less oil, traveling less and not engaging much with banks. Technology and Consumer Cyclical has seen massive jump from 17.5% to 24.6%(+41%) implying rapid tech adoption .
Mr. Time Traveller: This is an exciting change, Can you provide a deep-dive at sector level?
Mr. Market:Sure, Below chart represents performance of individual stocks in the industry, e.g if there are 3 stocks in Internet Retail with price change of +10%,+15% and +20% respectively, mean industry change would be 15%.
Learnings: Companies within the Solar industry have increased by 1.8X implying people’s adoption of free abundant sunlight for power generation. Internet retail(+1.1%) represents a social distancing impact and prefer the convenience of orders at fingertips. Home Improvement retail(+0.9X) represents focus on improving their infrastructure as it is new Home+Office( Zoom video must have also played a role)
Industries with sharp drops in their underlying stocks:
- Oil & Gas Equipment(-50%): People aren’t traveling and the world can live without burning extra XX gallons oil every day, Good for pollution control!
- Airlines and marine Shipping
- Department stores- Zero-sum game between internet retail and offline retail
Mr. Time Traveller: How has the importance of companies changed ? Which are the companies which gained and lost most in their valuation?
Mr. Market: Green-shots are visible in tech companies with special shoutout to Tesla(+$340Bn.) and Nvidia(+174 Bn.). Energy companies and banks are trending in red due to less commute and zero FED interest rates.Below bubble plot represents the $Bn. difference in Top 20 companies since the start of pandemic.
Mr. Time Traveller: At an overall market cap level, similar stories of Amazon, Apple and Microsoft is emerging, Can you provide insights into reshuffling of market order across multiple valuation tiers? Which of the companies has jumped/lost most spots?
Mr. Market: Sure, Interesting question. Below charts represent the jump in valuation spot, e.g 29 in Nvidia represents it jumped 29 spots from 42nd position in Jan’2020 to become 13th most valuable company owing to the importance of faster processing on GPU and Artificial Intelligence trend. Red bar represents the carnage i.e General Electric and BP dropped by 60 and 58 spots respectively.
Mr. Time Traveller: This presents an interesting viewpoint across market caps and order shuffling, Can we have an overall visibility on sector trend?
Mr. Market- Below chart is a violin plot where the small white dot at centre represents median change of companies within the sector. The fatness represents number of companies at every range e.g Technology has seen extremes(lean graph) vs Financial services sector is constrained in a small range(Potbelly shape graph).
The technology and healthcare sectors have been the biggest gainers. Finance, Real estate, and the Energy sector has taken hits as a result of FED involvement, WFH policies, and behavioral changes introduced by Covid
Mr. Time Traveller: How are individual industries in the respective sectors performing?
Mr. Market: Brace yourself for a lot of data-points across individual sectors.
Technology: Solar industry has increased by 180% i.e on average all solar companies have roughly doubled. Infrastructure, data, Semiconductors, and Saas companies are leading to the tech revolution and thus have been valued generously. However, there are dark spots in Hardware(Memory drives) and distribution companies probably due to cloud migration
Consumer Cyclical- Internet Retail and Home improvement have led the pack while gambling, luxury goods(faces hidden behind masks don’t really add much value to the luxury quotient) and textile manufacturing(Why would anyone wear jeans in WFH) has been brutally hit.
Healthcare: Coronavirus is a health crisis and who else would benefit apart from this sector. It's majorly green-shots with R&D and health information companies providing silver light to the early vaccine and fighting misinformation. Retailers and generic drug manufacturers are trending in the red owing to social distancing and lower spread of non-Covid d.
Consumer Defensive: Balanced sector with discount stores and grocery stores trending upwards while Household products and farm products in green. Reduction in tobacco companies probably due to less stress in WFH and need for healthy lungs to fight Covid( Joke attempt 😃)
Basic Materials- Gold and silver have suddenly become important currencies to hedge against the dollar due to huge stimulus checks and possible devaluation of the currency. The economy is on standstill will fewer construction works involving steel, aluminum, and Coking coal.
Communication Services: Gaming industries have witnessed a boom probably to engage kids with remote schools. Publishing has slowed down as content is available on the internet/kindle while Advertising agencies slowdown can be attributed to general industry slowdown and reduced purchasing power.
Industrials- There has been clear demarcation in this sector with integrated freight and Trucking companies such as FedEx(+64.2%) benefitting from e-commerce proliferation while airlines and Marine shipping taking a hit to prevent transmission of infection.
Financial Services: Banks have taken a huge hit due to FED policies and the general economic slowdown. Valuations of JP Morgan and Wells Fargo have dipped by more than $100 bn. However financial data provider companies have seen an uptrend.
Energy: Despite all the negative effects of Covid, it has definitely solved pollution and diminishing energy problems. Reduced demand has led to carnage in this sector with the silver lining of movement from conventional coal-based power to nuclear energy
Mr. Time Traveller: Wow thats a lot of information and learning to absorb, If I had to make some quick bucks, can you please provide an overview of companies performance in best and worst performing industries?
Mr. Market: Sure, I am listing down the industries and stocks on both ends of spectrum and their performances across the year, e.g Tesla in Auto Manufacturers industry has seen 398% price jump while Norwegian Cruises in Travel services has lost 71% of its market cap in 2020.
Mr. Time Traveller: Thats really good and I will learn more about them by googling, However can you provide a split of performances by Marketcap where I can play around and make informed decision based on my risk appetite.
Mr Market: Sure, let me integrate a plotly chart below so that you click on Market cap buttons and get returns across individual companies in 2020.
Mr. Time Traveller: This is very helpful. Thanks for detailed peek into the future and insights on how the new normal look like. Let’s be connected.
Mr. Market: Sure, I enjoyed our conversations, please ping back in comments if you remember something later during deep dives and would want to know more about the datasets, codes and methodologies. Feel free to connect on linkedin, I greatly enjoy data driven conversations. Also, check out my other stories on medium for other topics across Pyspark, Dask, Movie Recommendations, Neural Networks etc.
And who doesn’t enjoy a small clap on the story, Keep learning.