Snow day perspectives on stock forecasts
By Kyle Tetting
A month into 2021, I haven’t been able to escape the most pressing question of 2020: How did markets post such strong returns in the midst of such terrible news?
To begin to understand, consider snow days.
Snow days – those unexpected holidays, cherished by schoolchildren – may have been ended by the pandemic. For years, we’ve been reading about the possibility of virtual learning replacing the need to drive to school on wintry days. But, with virtual learning a pandemic-forced reality, more and more schools have embraced technology to overcome weather.
Of course, snow days are top of mind for me as I write this. My children, normally learning at school, are bouncing around my home office, gathering school supplies and staring out the window hoping to dive into a snowbank.
It can be a bit hectic, but I’m learning to focus on the positives in this pandemic. Having the children at home means lunch together and help shoveling, but it also reminds me of just how much change we’ve seen in such a short time.
Last fall, I wrote how we’d begun to see shifting winds in real estate, retail, restaurants and a variety of other areas. The message, then, was that pandemic disruption was as much a creative force as it was destructive. Lately, we’ve begun to see the specifics of the pandemic’s creative forces.
Publications including The Economist and Barron’s, in addition to consulting firms such as McKinsey & Company have all opined on the real productivity gains that have resulted from the pandemic. Rising productivity is typical in a recession, as companies cut back on hours worked, and inefficient businesses are forced to close. But the specifics of this pandemic have forced more permanent changes, or at least expedited trends already occurring. That may mean that higher productivity growth should persist even as vaccinations speed up and the virus spread slows.
Amid the pandemic, we’ve seen the forced adoption of new technologies.
Videoconferencing, offsite data storage and processing, and a variety of remote work tools have allowed businesses to work more efficiently. After the learning curve to implement them, the technologies provide more opportunities to work efficiently — including allowing the oversight of a child’s school day as I work from home rather than take a day off from work when the weather gets bad.
Beyond office work and school, retail and the service sector have been forever altered.
Online order management systems have gotten more robust. You could order groceries for pickup before the pandemic; you even might have gotten them delivered. But now you can choose from multiple services across multiple stores. As a result, entire distribution networks are changing to accommodate the aggregation of online orders rather than satisfying each individual shopper who walks through the door.
Prepared food delivery, once the domain of pizza places and the occasional sandwich shop, is now a reality for any restaurant that wishes to participate. In my own town, I can order from dozens of national food chains or choose from any number of great Mexican, Thai or Italian restaurants. Rather than in-person dining – requiring waitstaff, bussers and dishwashers – the kitchen pulls the order right from the system and packs it up to be picked up by a third-party driver.
Such changes are important for the economy at large. Making workers and entire industries more productive drives economic growth. It can also drive corporate earnings, as businesses do more with less.
Finally, while the pandemic rages on, vaccines and new treatments continue to suggest that we may eventually be comfortable visiting restaurants again, shopping at the store or meeting a client in the office instead of via Zoom. Even as we return to in-person activities, we will remember the lessons learned in the pandemic and resulting productivity gains.
As businesses rediscover lost sales, they will do so with fewer workers, less overhead and new systems designed to better cater to customer wants and needs. Accordingly, we may now put more faith in earlier forecasts for the strong recovery of corporate earnings. And, as shareholders look ahead to potential earnings growth, stock prices receive further support.
Just as the pandemic has altered how we handle snow days, its creative forces are boosting analyst outlooks for investments. We must temper our expectations for stocks, especially after 2020’s strong gains. However, a gradual reopening and the tailwinds of lessons learned from the pandemic afford a continued cautious optimism for stocks.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
(initially posted January 28, 2021)
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