2020 continues to be the year of struggle. Between record unemployment and a looming second shutdown, the United States economy is struggling to remain strong. Some large companies are sustaining revenue, but small cities and towns are a different story. As we push through Q4 of 2020, the new year will bring great hesitation.
Unemployment
According to the U.S. Bureau of Labor Statistics, April posted the worse month of unemployment at 14.7%. It has since bounced back but currently sits at 7.9% for September. It isn’t difficult to find where these jobs are being lost, simply look in the dining and entertainment sectors, along with tourist destinations.
Unfortunately, many of these job losses will turn permanent as businesses are unable to re-open. For those that are lucky enough to return, the economy has already been damaged. Unless there is a vaccine soon, it could spell disaster for local economic growth.
Interest Rates
In 2018, the Federal Reserve attempted to raise interest rates, nearly a decade removed from the housing crisis of 2008. However, those efforts were reversed, and rates were dropped to zero, with real rates turning negative.
With rates being low, it has several impacts. The first being deposit products such as checking accounts, savings accounts, and money markets. There is little to no incentive to save. Second, lending rates are near all-time lows. Combine those and banks are left to fight for every bit of interest income, potentially turning to alternative investments.
Lastly, with rates being low corporate debt has become attractive. With large sums of debt, coupled with an attempt to raise inflation, it will prove difficult to raise rates anytime soon.
Tech Stocks
One area in the stock market to benefit from this pandemic is the technology sector. More specifically, companies that aim to help people facilitate meetings and calls. Zoom Video Communications, Inc. (NASDAQ:ZM) is a company that continues to thrive. Up over 650% year-to-date, the company provides video conferencing and virtual meeting rooms for companies.
While the stock climbs, the question at hand is how high is too high? When a stock such as this explodes over a few months, it can quickly overshoot its fair value, forcing people to pay a high premium.
Other areas to monitor are the pharmaceutical sector. Throughout a normal year, companies put resources into research and development for drugs to help fight various illnesses. However, this year the race is to push out a successful COVID-19 vaccine. The chase for a vaccine can prove difficult, but the company who is approved first will reap the financial benefits.
At the end of the year, evictions can begin, and Federal student loans will become active. Combine this with a virus still killing and unemployment still near the highs, 2021 could have a difficult start. Look for the stock market to react with any news of a vaccine, stimulus package, or increase in cases.
But even though the picture is grim, there are still opportunities to allocate assets and potentially generate some alpha.
