There are only two types of stocks now: Corona proof and Corona prone.
Growth versus value, small cap versus large cap, domestic versus international are all secondary debates when thinking about why a stock has performed the way it has. This idea became apparent to me when looking at stock performance pre and post Feb. 20th (where I define the end of the pre-Corona era, as SPY hit its peak YTD that day). I want to show in this short letter that even when doing sector comparison performance, results are deceiving as stocks within sectors are showing completely different results (ex. XLRE and its underlying components).
Let’s take a look sector performance Jan 1 – Feb 20 (Pre Corona Era) and Feb 21 – now (Post Corona Era).
Top Sector Performance, Pre Corona
Top Sector Performance, Post Corona
Which sectors have seen the largest change in returns pre and post Corona YTD? In the below, I take the rank of each sector based on performance and look at the difference:
It’s not surprising to me that health care and consumer staples are great sectors to have in a virus-induced recession; what does surprise me is real estate and utilities going from outperforming to underperforming sectors.
In the case of XLRE, most of the associated companies own real estate that impact a variety of industries (AMT – cell towers, DLR – data centers, PSA – storage units, EQR – apartments, WELLS – seniors housing). A deeper analysis of XLRE shows more segmentation in the components that make up the ETF:
AMT and DLR have actually notched positive returns in the post-Corona world and outperformed the market (makes sense, data storage and cell towers are still essential and likely increase in value in a more virtual communication based world) whereas EQR is lagging the market and WELL has lost 46% of its value peak to trough (and again, makes sense – senior living during a virus where the elderly are most prone to its effects, a lot of renters aren’t paying rent in the apartment case). Clearly, stocks are diverging, and the old ETF groupings likely no longer make sense.
This effect is more pronounced in SPY, where megacap tech accounts for nearly 50% of the market cap of the ETF and is generally outperforming the market (NFLX just made an all-time high, MSFT, AAPL, GOOGL have all outperformed).
There will be many opportunities in the next few months to rebalance my portfolio in favor of companies that can thrive in pre and post Corona environments. The challenge here is developing a regimented and data-driven process that can identify those stocks.