During the last month we have seen an unprecedented shift in our livelihood, our capital markets, and our ability to work. While the many social-distancing investors around the globe are seeking to find the right time and method to get back into the markets, swarms of people are losing their jobs. In many cases, these job losses are coming despite the fact that, their city or region contains relatively few cases of COVID-19. Layoffs have been spreading throughout our communities faster and farther than the virus itself, laying waste to strong economies many miles away from the cities whose hospitals are plagued with thousands of coronavirus patients.
The most at-risk industries in the country are the Mining, Transportation, Employment Services, Travel Arrangements, and Leisure & Hospitality which amount to about 16.5% of the workforce. It is becoming increasingly apparent that the health and economic effects of the coronavirus are not going to be distributed equally, in either the short- or long-term . Many cities rely on those high-risk industries to fuel their economies with two major types of cities coming to mind: energy towns and resort/leisure destinations.
Energy towns and vacation destinations are highly concentrated in certain parts of the country, while in other parts of the country those industries are a minor to nonexistent part of the economy. Energy towns and vacation destinations are unique cases compared to other parts of the country because their economies are being affected in a far different way.
In economies that do not rely on tourism nor the sale of energy, stores and restaurants are being shut down in order to meet a new, lower demand for those products. Meanwhile energy cities are experiencing significant decreases in demand for their products due to stay-at-home orders. This, in turn is decreasing the available income in these communities and is compounding the damage done to their stores and restaurants because demand is shrinking at a higher rate than in other communities.
Similarly, vacation destinations are seeing their service economies rendered obsolete as their economies can’t support their stores and restaurants without the usual influx of tourists. Without tourists, cities like Las Vegas - the most at-risk vacation city in the country with nearly 34% of the population holding high-risk positions – are losing jobs at a higher rate than more diverse economies. Vacation hotspots are likely to endure longer recoveries alongside the energy towns because they will likely begin recovery sometime after their busiest season and they will be starting their recovery from a lower point.
This geographical reality will be a pivotal factor in whether an investor will be able to successfully ride the markets back up, or if they will be too early or late to the party to see any profitable gains. As investors try to get back in the market, it will be important for them to ask both “who has traditionally purchased this product or service” and “where is that purchase originating.” It will also be important for the investor to note which stage of recovery different regions are experiencing in order to invest in the highest-yielding sectors of that region. Investing by sector throughout the stages of economic recovery is called sector rotation and is a popular method used to shield against risk in recovering markets.
For example, large chains, like Dunkin Donuts (DNKN) , tend to have geographic areas that they dominate, while they struggle in other areas. This tendency will make it more important than ever for investors to locate where potential investments do well geographically because the market in which the underlying company earns profits may be in an earlier or later stage of recovery than the country as a whole, which will significantly decrease the potential profits from the investment.
While no investor can perfectly time the market and take every important detail into consideration during their analysis, it is important that they monitor local and regional economies and not just the economy as a whole. This will provide the investor with more choices in where they invest and, in a sector rotation strategy, they will be able to find higher yielding opportunities throughout the duration of the recovery because they will get to choose which stage of recovery they are investing in.
