The COVID-19 pandemic crushed many stocks across the retail, travel, and energy sectors in 2020. Meanwhile, companies that were better insulated from the headwinds -- especially in the tech and consumer staples sectors -- became safe haven investments.
However, many of the stocks that outperformed the S&P 500 last year have underperformed the market so far this year, as rising vaccination rates have shifted the spotlight -- and investors' money -- toward reopening plays. That shift consists of lots of moving parts. Here are the five main trends investors should follow.
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1. Rising bond yields
Yields on U.S. Treasury notes hit historic lows last year during the initial stages of the COVID-19 crisis. But they've steadily risen since then, as expectations for inflation in an accelerating economy sparked a sell-off in bonds.
That might sound confusing, but the mechanics are fairly simple. Investors generally sell more bonds when they expect inflation, as it erodes the value of their principal and fixed interest payments.
As bond prices decline, their yields rise. At some point, the yields on government bonds could match the yields on dividend stocks. When that happens, investors often swap back from stocks to the safety of bonds.
Data by YCharts.
Last year, stocks in pandemic-insulated sectors were generally considered better investments than low-yielding bonds. But as seen in this chart, expectations for an economic recovery caused bond prices to decline and their yields to steadily rise this year. Some investors see that shift, which makes some equities less appealing than bonds, as a cue to take profits in some riskier stocks.
2. Tougher comparisons for "pandemic stocks"
Those rising bond yields have caused some stocks with frothier valuations to lose their luster this year. Investors also expect companies that saw unusually high growth during the pandemic -- such as Zoom Video Communications (ZM +0.30%), Peloton Interactive (PTON 0.13%), and Shopify (SHOP 3.33%) -- to face tough year-over-year comparisons after the crisis ends and this has caused some investor pessimism. Here's how those three high-growth darlings have fared since the beginning of 2021.
Data by YCharts.
Zoom, which became synonymous with video calls during the pandemic, could face slower growth as more people return to school and work. Demand for Peloton's remote workout bikes could wane as gyms reopen, and fewer merchants could rely on Shopify as they reopen their brick-and-mortar businesses.
Worries about tough comparisons are causing some investors to rotate from the so-called "pandemic stocks" toward "reopening plays" which will benefit from easier year-over-year comparisons.
3. Focusing on reopening plays
Companies in battered sectors like brick-and-mortar retail, travel, and energy are bouncing back as investors expect easier year-over-year comparisons. That's why stocks like American Eagle Outfitters (AEO 4.50%), Expedia (EXPE 0.73%), and Chevron (CVX +0.05%) have all recovered and outperformed the S&P 500 so far this year.
Data by YCharts
These three companies are all generating stronger growth this year as brick-and-mortar stores reopen, travel bookings gradually warm up, and energy prices stabilize.
Investors should still be selective with these reopening plays, since some of them are now trading at high valuations. However, many of them remain cheap relative to their growth potential.
AEO, for example, trades at just 17 times forward earnings and pays a forward yield of 1.5%. Analysts expect its revenue to rise 28% this year with a return to stable profitability, thanks to the expansion of its high-growth Aerie brand and bankruptcies of retail apparel rivals.
4. Pay attention to rising oil prices
Oil prices plunged to multiyear lows by April 2020, as the pandemic disrupted economies and caused a global glut in production. A price war between Saudi Arabia and Russia exacerbated those declines.
But over the past 12 months, the spot price for Brent crude oil has more than doubled. Production cuts, stabilizing economies, and expectations for high post-pandemic demand are driving oil prices higher.
Like higher bond yields, rising oil prices indicate the global economy is recovering. But they can also hurt oil-consuming industries, such as airlines and cruise ships, if they climb too quickly. Therefore, investors who expect those industries to recover in a post-pandemic world should keep close tabs on oil prices as industrial production heats up and more people travel again.
5. An uneven global recovery
The main economic indicators indicate the pandemic's impact is weakening, but the global recovery could be volatile and uneven. The situation is improving in the United States, but other major markets like India and Japan are still struggling with low vaccination rates and new waves of infections.
Those challenges could generate unpredictable headwinds for multinational companies with regional slowdowns and weakening currencies. Meanwhile, other ongoing issues -- such as the global chip shortage and trade tensions between the U.S. and China -- could make things even more difficult.
The bottom line
The bulls have pivoted from pandemic plays to reopening stocks over the past few months, but investors should do more homework before jumping on that bandwagon. Not every growth stock should be sold, and not every battered value stock is a great reopening play.
