Will Laggards be Leaders in Wall Street Recovery?

Sanghamitra Saha

29 April 2020 at 7:56 am·5-min read

U.S. stocks have been steady of late with investors shifting focus to the reopening of economy and an improvement in virus cases. Recent data points showed that the outbreak is gradually coming under control, even in the hardest-hit states. Treasury Secretary Steven Mnuchin indicated that we may see “the economy really bounce back in July, August and September” after reopening in May and June.

We all know, there is a mammoth Fed and government stimulus to aid market recovery. The Fed has cut rates to zero and launched unlimited QE. It also agreed to buy highly-rated corporate bonds and intervened in the municipal bond market. Moreover, the Fed announced an investment of up to $2.3 trillion in loans to aid small and mid-sized businesses, and state and local governments, as well as to fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.

Plus, there is the government’s $2-trillion package in place. The latest extension of the Paycheck Protection Program (PPP), which is called Phase 3.5, acted as a big tailwind for small-cap stocks. The program increases the PPP by an additional $321 billion. Plus, it has extra funding for disaster relief, hospitals and testing.

All these have benefited the S&P 500, the Nasdaq and the Dow Jones by 10.8%, 11.8% and 9.9%, respectively, in the past month (as of Apr 28, 2020). In the past five days, the three indexes gained 4.6%, 4.2% and 4.7%, respectively.

Against this backdrop, below we highlight a few sectors that are on fire right now. These sectors were badly beaten down in the coronavirus selloff and are looking well poised to rally faster than the broader market.

Retail

Retail — predominantly dependent on consumer discretionary activity — had a painful stretch in the peak of the pandemic due to store closures. Gradual reopening of businesses and job creations should favor this hard-hit sector. Cheap oil price is another positive for the sector. However, the recovery may be rough with consumers being cash-strapped.

Retail ETF SPDR S&P Retail ETF XRT gained 6.60% in the past two days (as of Apr 28, 2020). Two retail winners of past week are online home furnishing company Wayfair Inc. W (up 27.6%) and cardio and strength equipment maker for home use Nautilus Group Inc. NLS (up 29.4%).

Banks

Talks of reopening and government protection for small-caps reduced delinquency risks for pint-sized stocks, which in turn favored banking stocks as this enhances banks’ credit quality. Moreover, the 10-year Treasury yield marked the biggest single-day jump in three weeks on Apr 27. If markets remain steady ahead, bank stocks may stage a rebound on higher yields.

SPDR S&P Bank ETF KBE added 9% in the past two days. First Interstate BancSystem Inc. FIBK (up 11.2%) and Regions Financial Corporation RF (up 11.5%) are also among the many winners of past week.

Homebuilding

Lower-than-expected decline in mortgage rates, labor shortage and a reduced wealth effect wreaked havoc on the sector in the past. However, a stock market bounce and the resultant wealth effect, economic normalization, and Fed and government stimulus should act in favor of housing stocks, especially giventhe rock-bottom rates prevailing in the economy.

Inventory levels should improve at the current level as builders have continued operations despite the shutdown and demand has slackened. Rising home pricesshould see some moderation too, adding to affordability.

SPDR S&P Homebuilders ETF XHB jumped 9.4% in the past two days. M/I Homes Inc. MHO (up 22.5%) and Toll Brothers Inc. TOL (up 16.4%) were the two prominent winners in the past week.

Casino

Casino stocks, another laggard amid coronavirus selloffs, are also looking forward to reopening. Las Vegas Sands’ expectations of a quick recovery in Asia are boding well for the space. The company is looking to deploy capital toward M&A. Las Vegas Sands is confident that it will be in a better position this summer and improve further in the fall. The upbeat mood has spread through the entire sector.

VanEck Vectors Gaming ETF BJK gained 9.4% in the past two days. PlayAGS, Inc. AGS (up 22.1%) and Caesars Entertainment Corporation CZR (up 15.1%) are two notable winners in the casino gaming space.

Real Estate

Re-openings mean more job creation and regularization in rent payments. This is especially true given the Federal Reserve and government injected billions of dollar into the economy to help corporations and households meet their essential financial obligations. This should benefit the real estate sector in the near term. Prevailing low rates is another positive for this high-yielding sector.

Schwab U.S. REIT ETF SCHH added 5.8% in the past two days.Residential REIT Sun Communities Inc. SUI (up about 15%) and retail REIT Pennsylvania Real Estate Investment Trust PEI (up 15.2%) were two winners of past week.

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Will Laggards be Leaders in Wall Street Recovery?