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Will a Second COVID Wave Cause Another Stock Market Crash?

By Sam Swenson, CFA, CPA – Jun 28, 2020 at 8:00AM

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Here are three sectors that would be negatively affected and three that would benefit from another COVID wave.

The coronavirus pandemic has caused market turmoil not seen since The Great Depression, which has decimated retirement plans for some and created tremendous opportunity for others. The initial "V-shaped recovery" has felt optimistic at best, and a second wave could perpetuate a "W-shaped recovery" if we see further lockdowns.

If we look at the market from a birds-eye view, it is useful to identify sectors that may be adversely shocked, as well as those that may even benefit, should another outbreak of COVID-19 occur.

upward sloping chart.

Source: Getty Images.

3 sectors that could suffer

These three sectors are directly in the crosshairs of a second wave. 

1. Consumer Discretionary

Additional unemployment applications, along with expiring unemployment enhancements, simply means less disposable income available for spending. A sector that derives its long-term value from consumers' availability of excess income to purchase non-essential goods needs to be avoided if we are approaching another shutdown. One example of the potential impact to the sector is deferral of home improvement projects, affecting stocks like Home Depot and Lowe's. General retail stores like Target and textile companies like Nike tend to also struggle during periods of cyclical weakness.

2. Transportation

Travel companies, notably airlines and cruises, saw sharp decreases in stock price during the initial market crater in March, but have since recovered. A second wave of coronavirus could easily send transportation stocks plunging through their previous lows, especially given the high fixed costs and low profit margins associated with operating an airline or cruising company. Airlines seem to lose their appeal quite rapidly once we realize there isn't much of a purpose in flying empty seats or cruising empty beds around the world. 

3. Energy

With less air travel, manufacturing, and industrial activity, energy sits in a precarious position -- just a few months removed from oil prices nearing $10, we've seen a recovery in which prices have risen to just under $40. For context, just a decade ago, many Wall Street firms were predicting $200 oil with a seemingly untouchable ceiling -- this heightens understanding with regard to just how much price dynamics have changed over time. Simply put, the sector seems too volatile and perilous to engage with over the next 12 to 18 months. 

3 sectors that could be benefit

These three sectors would likely get a boost if a second wave or lockdown come to light.

1. Consumer Staples

Companies that sell essential goods should maintain stable earnings throughout a potential second wave. Examples include CVS (CVS -1.48%), Walmart, and Target; these companies have the inventory, store count, and digital presence necessary to weather another protracted slowdown. Additionally, investors may find safe haven in companies that have displayed steady but not spectacular growth -- an indicator of prudent capital management and the ability to maintain reasonable revenue goals. An interesting backstory is that CVS has added further strength through its acquisition of Aetna in 2018, giving it access to a significant network of plan subscribers. CVS operates a fleet of MinuteClinics too, which provides highly accessible healthcare to customers who may not otherwise be able to see a private provider. 

2. Technology

Work-from-home culture, another outgrowth of our rapidly changing society, has created innumerable opportunities for tech firms to solve the new problems of daily life. A second wave of coronavirus would almost certainly force organizations to take an even greater look at having part or all of their respective workforces operate on a remote basis. My wife, who is a special needs educator at a start-up school, has become entirely fluent in Slack (WORK) -- I'm particularly impressed with how the program can streamline and optimize workforce collaboration and believe that it's here to stay. Slack has no debt and could be an attractive takeover target in the future, but today it's a revolutionary company that could soon be the tech sector's new darling. 

3. Healthcare

With a second spike of the virus, markets would be especially sensitive to healthcare news, much like we saw during the first wave. Healthcare companies have already begun to innovate in many ways, with advancements in telemedicine being readily visible, but the major innovation will come as companies get closer to a reliable vaccine. The strongest reason to be bullish on the sector, however, has to do with its stability during difficult periods in the economic cycle. Companies like Johnson & Johnson and Pfizer have been dividend aristocrats for decades, and will continue to persevere through a second wave. Healthcare is not entirely recession-proof, as non-urgent and elective procedures may be postponed, but the core of the industry will continue to exist in a position of strength.

The looming second wave is definitely anxiety-inducing -- because of course there's a second wave -- but we can construct a type of portfolio insurance by overweighting sectors that are likely to withstand any economic environment (consumer staples, healthcare). The technology sector, in the midst of a second wave, will have the chance to capitalize on a rapidly changing society, and it will continue to exert its influence on all aspects of life. A recommended way to achieve these exposures is to focus on sector indices, which can dampen the day-to-day volatility of single stock ownership. However the virus ends up behaving, we can use this opportunity to examine our portfolios more closely, and ensure our risk exposures are in line with our respective risk tolerances. 

Sam Swenson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot, Nike, Slack Technologies, and Spirit Airlines. The Motley Fool recommends CVS Health, Delta Air Lines, JetBlue Airways, Johnson & Johnson, and Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$270.94 (0.67%) $1.80
Pfizer Inc. Stock Quote
Pfizer Inc.
$44.08 (-1.10%) $0.49
Johnson & Johnson Stock Quote
Johnson & Johnson
$166.72 (0.33%) $0.54
Walmart Stock Quote
$130.06 (-2.50%) $-3.33
Target Corporation Stock Quote
Target Corporation
$152.61 (-0.23%) $0.35
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$188.13 (0.01%) $0.01
CVS Health Corporation Stock Quote
CVS Health Corporation
$98.35 (-1.48%) $-1.48
NIKE, Inc. Stock Quote
NIKE, Inc.
$97.02 (-1.55%) $-1.53
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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