No investment sectors were left untouched by COVID-19 in 2020, and with the pandemic still raging -- and vaccines unlikely to be widely available to the masses for several more months -- don't expect a drastic recovery in early 2021.
Investors, though, should be looking further ahead and considering what conditions will look like once the threat of the coronavirus recedes. Will consumer behavior shift back to pre-pandemic norms, or is the new normal here to stay? And for the millions whose finances were left in shambles by the pandemic, just how deep are the scars?
As they assess those questions, here are three industries investors should watch.
1. Airlines: Can pent-up demand stop the bleeding?
In 2020, airlines lost an average of $66 for every passenger they carried, according to the International Air Transport Association. The trade group expects 2021 will be the second-worst year ever for airlines -- the worst ever, of course, being 2020 -- with projected losses of $38.7 billion. Airlines won't reach the point where they're bringing in more cash than they're spending until the fourth quarter, the IATA estimates.
Airlines in the U.S. raised $50 billion of debt and equity last year in their efforts to keep enough liquidity to survive the pandemic. Plus, the rules under which they got federal aid via the CARES Act largely prohibit them from using free cash for share repurchases or dividend payments.
Does that mean investors should shun airline stocks? Warren Buffett apparently didn't think the risk of holding them was worth it. He sold off Berkshire-Hathaway's airline holdings early on in the pandemic. Some retail investors, though, have flocked to the battered sector.
Airlines and airline bulls are hoping the carriers will get a much-needed boost in 2021 as pent-up demand for travel is unleashed. But whether that will be sufficient to make investing in airlines a winning bet for the long run is unclear. Domestic leisure travel does seem likely to rebound in the coming year, but experts expect that international travel will be slower to pick up.
In addition, many observers are skeptical about whether business travel will ever recover. Companies have been operating remotely for nearly a year at this point, and it's possible that managers who have gotten used to video-conference meetings won't be eager to start footing large travel bills for in-person meetups again. The Wall Street Journal recently predicted that up to 36% of business trips could disappear forever. Bill Gates made an even more pessimistic prediction, asserting that 50% or more of business travel will never return. Permanent declines in international and business travel would be crushing for airlines, given that those categories tend to be far more profitable for the carriers than domestic leisure travel.
The airline industry's 2021 results will start to provide some insight into how much of the pandemic's impact on travel will be felt long term. But even a year from now, we probably won't know whether Buffett made the right call by selling off Berkshire's airline holdings, or whether bargain-hunting retail investors have been correct to pounce.
2. Financials: Will bank stocks be a bargain for long-term investors?
Banks haven't been the villains of the coronavirus crisis -- a big change from their behavior during the financial crisis of 2008 to 2009. In fact, they've generally worked with customers impacted by the pandemic to allow them to spread out or defer credit card and loan payments. They've helped struggling small businesses get Paycheck Protection Program loans, and they earned billions in fees in the process, though some major banks have said those fees will barely cover their costs.
But bank stocks were among the big losers of 2020. In a year when the S&P 500 index delivered returns of about 16%, shares of the "Big Four" -- Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo -- sapped value from investors' portfolios. That isn't especially surprising given that commercial bank stocks are cyclical: They generally perform well when the economy is thriving and fare poorly during recessions.
Central banks including the Federal Reserve cut their benchmark interest rates to near zero in their efforts to ease the economic shocks of the pandemic, and they're expected to keep them there through at least the end of 2023. That's not great for commercial banks, but ultra-low interest rates are a minor concern in the grand scheme of things.
Banks set aside billions of dollars during the first half of 2020 to prepare for what they anticipated would be massive loan defaults. But we don't know just how deep those losses from defaults will cut. Thanks to a combination of generous unemployment benefits under the CARES Act, stimulus checks, and the hardship agreements that banks themselves offered, many people with financial troubles were still able to stave off delinquency.
A Deloitte Center for Financial Services report estimates that U.S. banks could have to write off $318 billion in loan losses by 2022. That would account for about 3.2% of overall loans with the worst losses coming from credit card debt, commercial real estate, and small business loans. Still, the Federal Reserve's latest round of stress tests revealed that banks were prepared for a worst-case scenario in which losses hit $600 billion.
There's a good possibility that defaults won't reach the levels that banks have prepared for. Fitch Ratings recently revised its 2021 sector outlook for U.S. banks from negative to stable, saying that fundamentals held up better than initially predicted and noting that the second half of the year could bring a modest uptick in loan activity if vaccine distribution is effective.
2021 is unlikely to be a banner year for banks, but it could be the perfect time for value investors with long time horizons to scoop up bank stocks on the cheap.
3. Healthcare: Will telemedicine make your doctor's office obsolete?
The telemedicine boom was already underway before the pandemic, but COVID-19 fueled explosive growth for the niche in 2020. Telemedicine use was up 1,000% year over year in March and 4,000% in April, according to a research paper published on the JAMA Network. A Fortune Business Solutions report estimates that the size of the telemedicine market will grow to nearly $560 billion by 2027, up from $61 billion in 2019.
Obviously, your doctor isn't going to perform surgery on you via Zoom, and telemedicine will never replace many forms of in-person care. But some specialties such as psychiatry and general mental health treatment could thrive under the model. Mental health start-ups like Talkspace and Betterhelp, which was acquired by Teledoc in 2015, saw a surge in new users in 2020.
Livongo -- another Teladoc acquisition -- has proven that chronic disease management can be improved with such technology. And at-home medical testing could skyrocket. Health start-up EverlyWell, which unveiled a home COVID-19 test in 2020, just raised $175 million in Series D funding.
As patients' costs for more of these telemedicine services become eligible for reimbursement through Medicare, Medicaid, and private insurance, the boom in this niche will no doubt continue. Smart investors should keep an eye out to see what new frontiers virtual care crosses in 2021 and beyond.