Almost no losing stocks

In the first few months of the pandemic, tech companies such as Amazon and PayPal benefited from their online retailing performance. Companies in energy and tourism lost the most value. By mid-2021, however, most stocks recovered, even surpassing their pre-corona value levels. Until recently, a handful of stocks have continued to rise undeterred, the most being the FAANG stocks (Facebook/Meta, Apple, Amazon, Netflix, and Google/Alphabet), along with Microsoft and Tesla. These stocks make up a large portion of the stock market’s returns in 2020 and 2021, and they are part of the Information Technology group. Other stocks that are part of Consumer Discretionary also fared well due to their structural growth in digitization and technology. The best performing stocks in the early days of the pandemic were those that benefited directly from Covid-19 disruptions, such as when social distancing, remote commerce and working from home catapulted Zoom and Amazon stocks to the top.

This is also true in Europe and emerging markets, where tech and health outperformed cyclical stocks. However, as the pandemic receded and economies started to open, most cyclicals recovered a great deal of their value. Demand for these stocks eventually gained momentum due to governments intervening with fiscal stimulus and monetary expansion. For instance, energy company stocks such as ExxonMobil and Chevron rebounded as global demand for oil recovered and financial stocks received a huge boost thanks to stimulus injections. To be sure, cyclicals tend to outperform at the beginning of an economic recovery, and many could be poised for a particularly robust upswing given their historic undervaluation.

Tech stocks have outperformed thanks to remote work, online shopping, and social distancing. However, other forces are also at play; many businesses demonstrated a remarkable Leaning to Adapt by improving customer experiences and taking full advantage of technology, cheap loans, and boosting productivity along the way. Other businesses also used their knowhow to keep their supply chain running smoothly, with little bottlenecks. These businesses understood that navigating what seemed to be a long-standing crisis required them to invest heavily in modern technologies and build a robust and functional online presence.

Back to Keynes

The sectors that did well when Covid waned, such as the financials, real estate, and energy, have seen a robust demand not just due to their company-specific fundamentals, but also due to governments’ generous stimulus packages. This is particularly the case in the US, where policymaking favored a direct intervention comparable to that in the 2008 global financial crisis. With Uncle Sam in the driving seat, the world followed suit; the EU agreed on billions of euros to help tackling the crisis with a particular focus on recovery and improving resilience.

However, the financial resilience of the private sector in some of the peripheral countries of the EU was put into question for the lack of fiscal space that resulted from constraints on government spending and debt accumulation. For instance, in countries like Italy and Spain, the number of bankruptcies at the end of 2020 added to EU’s financial distress. Though the EU initiated a large-scale financial support to contribute to a greener, more digital, and resilient economy, governments’ fiscal constraints continue to be a drag on economic growth.

In addition, many businesses around the world have become highly indebted, mostly due to the need to survive the crisis with additional borrowing. More corporate debt means lower credit ratings and loss of confidence from investors. But confidence started to recover as soon as Covid-19 waned and governments pledged support programs. This time too, the world has leaned that fiscal policy is as important as monetary policy. Keynesian economics is back again as a viable policy model.The power of fiscal policy in times of crisis is once again recognized as the most effective option to stem recessions and revive growth. The point is that governments around the world, at least in countries with currency sovereignty, can still use their full fiscal powers to restore confidence to markets.

In the Arab gulf, where oil price is a gauge for economic growth, the picture isn’t much different. As Covid-19 hit, economies contracted and demand for oil collapsed by 70%. While this was considered one of the biggest demand shocks in recent history, the loss in value didn’t take much to recover and even increase to record highs compared with performance over the past eight years; recently, oil price increased to $80, the highest such level since 2014.

Long-term trends

Overall, most businesses have recovered but the ones that kept up with innovation and invested in research and development have been able to recover faster. The financial industry has emerged from the pandemic almost unscathed. Just like in the 2008 global financial crisis, governments’ support proved crucial in helping cyclical sectors to recover without much damage to their balance sheets. Today, even with Omicron cases skyrocketing, the market seems bent on following long-term trends; the sectors that have lagged at the start of the pandemic are considered to have big potential gains given their perceived undervaluation.

When the dust settles, a winning strategy is to invest in perceived undervalued stocks that would outperform on the long run. Knowledgeable investors avoid poor, short-term financial decisions during chaotic times and prioritize long-term planning. They know that short-term doesn’t pay off. A long-term investment model, for instance, needs to account for some degrees of uncertainty, including the possibility of downturns and market corrections. Moderate rates of return, reduced spending levels and revised annual saving goals must also be part of any strategy. Financial downturns create stress and lead to poor decisions. Such poor decisions typically rest on the wrong belief that outperforming stocks are poised to sustained, long-term growth. This is a mistake; only if the pricing of these stocks reflect strong fundamentals would they keep raising in value. The fact of the matter, however, is that most short-term price hikes reflect a herd mentality; Much investment can be the result of uninformed investors responding to positive news at a time of uncertainty. Alternatively, for a lot of stocks, a short, sharp drop is a temporary glitch that doesn’t reflect fundamentals, but only underscore the need for a wise, patient, and forward-looking strategy.