Navigating Market Uncertainty: A Deep Dive into 2020 Economic Pain

One of the things that will make this period the most written about economic event since The Great Depression is the uniformity in which pain has been inflicted on investors.

It is hard to find an area of the market that has not been bludgeoned in 2020. Major U.S. indexes are all down double-digit percentage points. The MSCI EAFE Index is down 20%. Nearly every commodity is down, led by crude oil’s 81% plunge. Same for most of the major global currencies.

In truth, there have been very few places for retail investors to hide. Treasuries, gold, orange juice futures, and the U.S. dollar are all up year-to-date—not a very encouraging list. This is perhaps why money market funds saw a record $681 billion in inflows in March.

Many have taken solace in the fact that U.S. indexes have bounced off their March lows. To put the rebound in perspective, just 32 stocks in the S&P 500 ended the first quarter in positive territory for the year. In the three weeks since March 31, that number has increased to 83.

On the ETF front, 99 non-leveraged equity ETFs are now up for the year, the vast majority in the technology and health care sectors. Those two sectors, combined with a smattering of consumer staples and consumer discretionary names, represent the areas of relative “safety” in this market.

But the real outperformance can be found by drilling down.

Though the Health Care Select Sector SPDR ETF (XLV) is down 12% year-to-date, biotechnology has shined. The broad-based iShares Nasdaq Biotechnology Index Fund (IBB) is up 4% thanks to names like Gilead Sciences, Regeneron Pharmaceuticals, and Vir Biotechnology.

On the consumer front, the e-commerce theme has been led by names like Shopify, Etsy, JD.com and Chewy, all of which are up at least 28% on the year. Netflix has also benefited from nationwide stay-at-home guidelines, as have Domino’s and Wingstop, apparently buoyed by an increase in carryout orders.

Technology is where things get interesting. While the Technology Select Sector SPDR ETF (XLK) is down 11% year-to-date, individual themes like esports, business software, cloud computing and cybersecurity have all dramatically outperformed.

And then there is the mega caps. The five largest stocks in the S&P 500—Microsoft, Amazon, Apple, Google, and Facebook—have gotten even bigger in 2020. As Jim Bianco pointed out, those five stocks now make up roughly 23% of the S&P 500. This marks the greatest concentration of the top five stocks in the index since 1977.

The first wave of panic on Wall Street has subsided, and we do not know if others will be coming. But even as we navigate the worst pandemic in a century and enter what many expect to be the worst economic period since The Great Depression, the names above remind us there will always be winners.

All return data is as of April 21, 2020

The author is long Microsoft, Amazon, Apple, Google, Facebook, Gilead, and Regeneron in his retirement accounts.

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