In November, Federal Reserve chairman Jerome Powell made a troubling assertion about the global COVID-19 pandemic and its long-term consequences. "We're not going back to the same economy," Powell said to a San Francisco-based economic development group, "we're going back to a different economy."
While the timeline for economic recovery is unclear, the Fed chair believes that the business world will be vastly different when things finally return to normal. The shakeup has ramifications for the industries that are likely to dominate business moving forward, and investors would be wise to consider these forces when putting together long-term stock portfolios.
Existing trends have accelerated
Businesses and consumers quickly changed their behaviors at the onset of coronavirus restrictions, and many of these adjustments simply hastened the shifts that were already occurring. Technology improvements have enabled remote work, e-commerce, and automation to grow in popularity in response to the demand for convenience and cost savings.
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The pandemic forced many offices to close, and businesses adapted by investing in communication and cybersecurity technology. They've also developed the workflows and general comfort to make remote work feasible. While the vast majority of employees are likely to return to offices once that becomes safe, the appetite for office space in expensive cities is already jeopardized. A sizable number of people who started working remotely in 2020 will continue to do so indefinitely.
E-commerce sales have been growing quickly every year for more than a decade, but a spike in 2020 is likely to drive some permanent market share gains for online channels. Consumers are more comfortable and familiar than ever with online purchasing, retailers are investing heavily to drive customers to their online platforms, and many brick-and-mortar stores are closing their doors forever. There's bound to be some recovery as people return to stores in person, but it is unlikely that we'll ever return to pre-pandemic volumes.
Automation has been present in areas such as manufacturing for decades, but the proliferation of artificial intelligence and machine learning has opened the door for automation in a number of functions. Finance, data analysis, customer service, and a variety of other operational activities have joined manufacturing as those in which humans are being replaced by new robotics and software. Businesses have invested in these capabilities out of necessity when human labor became unavailable, and they've now cleared a hurdle to attain a new level of cost efficiency. It wouldn't make sense to revert to the old model in most cases.
Industries set for growth
When Powell indicates that we aren't going back, this means that a permanent reshuffling has occurred, and investors should understand that there will be winners and losers. Certain types of employment will be threatened, which has knock-on effects for the businesses that those workers support with their dollars.
More directly, some industry groups are going to enjoy higher demand, whereas others will be struggling in shrinking markets or amid more competition. Investors shouldn't overreact, because things aren't going to be drastically altered overnight from this point, but these considerations are important when building a long-term stock portfolio.
Companies that enable remote interaction and automation are more likely to enjoy a period with strong growth catalysts over the coming decades. Telehealth, communication software, cybersecurity, e-commerce stocks, services that enable e-commerce (e.g. payment processing), and the providers of data network infrastructure are among the industries that fit this mold.
Similarly, robotics, data analytics, and AI stocks should benefit from their services becoming increasingly embedded in the functions of businesses that previously had no use for them. Investors may also want to consider REITs that own network infrastructure and data centers, which will benefit from the growth and stability of their tenants.
Industries under threat
Conversely, industries and regions are going to struggle through this evolution, and investors should be cautious about their long-term exposure to them. Obviously, retailers that are not prepared to compete through online channels are at a disadvantage.
Demand for office real estate may also suffer, especially in major cities that have traditionally been expensive centers for certain industries. Also on risky footing are companies that provide services or equipment for workers that are being replaced by automation, such as providers of protective gear for factory employees or staffing companies filling administrative roles.
Some members of these industries will almost certainly adapt and thrive. But the industries as a whole are going to face challenges.
How to respond
There's an important caveat here. The market has already been kind to these high-upside stocks, so investors should make sure to avoid piling too heavily into positions with exceptionally high valuation ratios that already presume future success.
There is nothing wrong with having some expensive stocks in a portfolio, but having too many will lead to some real downside risk whenever there is a stock market correction. Meanwhile, investors should be mindful of their exposure to industries with predictable headwinds, as stocks in those sectors could remain under pressure.
