- The Fed's Beige Book contains qualitative information that can help investors pick winners and shed losers.
- All the 12 Fed districts have witnessed most business sectors perform badly.
- Though travel, tourism, oil & gas, aerospace, and certain commodities are down in the dumps, there are a few business segments that are shining through this disruption.
- I do much more than just articles at The Lead-Lag Report: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Whoever controls the volume of money in any country is absolute master of all industry and commerce. - James A. Garfield
The Fed's Beige Book publishes qualitative information that can help analysts and investors latch on to emerging trends that are not captured by recent data. The information is collected directly from a large variety of businesses and community contacts and that's why the Fed says it is ahead of the curve.
But, hey, let's pause a bit.
The whole idea behind identifying the emerging trends is to ensure that we latch on to winning trades before the herd enters.
After the COVID-19 disruption hit us, the Fed has been relentlessly pumping money into the markets to the extent that in April 2020 the rally in junk bonds outperformed the equity market index. I had said this in The Lead-Lag Report and tweeted about it as well. The Fed has almost finished off the market cycles, and stocks are zooming even as fundamentals continue to deteriorate. So, when the Fed releases its Beige Book, all that an analyst can do is identify the emerging sectors - but the stocks in such sectors may already be outperforming.
Image Source: Twitter
The Fed's easy money policy just doesn't allow investors to take advantage of market bottoms. And that's my caveat: Emerging sector stocks may already be rocking and rolling, and therefore, please double and triple down on your risk management policy. Here we go:
Consumer spending took a solid beating during the survey period, mainly because retail establishments were shut. It decreased from $13.41 trillion in Q4 2019 to $13.18 trillion in Q1 2020. It is easy to guess that April (the stay-at-home month) will be worse than March.
Image Source: Trading Economics
Business segments such as leisure, hospitality, energy, automobiles, and aerospace took it on the chin. However, the automobile sector has witnessed an uptick recently because states have started reopening, but the jury is still out.
Residential home sales and construction activity fell sharply, but low mortgage rates coupled with recent states reopening have pushed up activity. The NAHB/Wells Fargo HMI which represents three indices (Present Single-Family Sales Index, Single-Family Sales for the Next 6 Months Index, and Traffic of Prospective Buyers Index) jumped to 37 in May 2020 after crashing to a low of 30 in April. Though it has still some way to go before it reclaims its March number of 72, it is heartening to witness a bump-up. Commercial real estate was hit very badly. As per data collected from the Fed districts, many retail tenants missed paying rent or deferred it.
Image Source: NAHB
Many meat plants closed and that hit the agricultural sector. Though the plants have reopened, there has been a surge in COVID-19 infection among the workers. According to the Washington Post, COVID-19 cases linked to meat processors like Tyson Foods (TSN), Smithfield Foods (SFD), and JBS (JBS) have more than tripled in the past month. Though food is an essential business, it remains to be seen how the situation plays out. Oil prices plummeted because of the drop in demand and drilling activity fell sharply.
Overall, the business atmosphere remained uncertain, and the mood, pessimistic.
All Fed districts reported a drop in employment because of business closures and social distancing (substantially lower capacities). There was a surge of demand for PPP (Paycheck Protection Program) loans, which convert to an incentive if the employer retains all employees on the payroll for 8 weeks, and uses the money for payroll, rent, mortgage interest, or utilities.
The highest unemployment was witnessed in the retail, leisure, and hospitality sectors. Some firms cut wages, while others had to increase wages temporarily for essential staff, or in cases where unemployment insurance was higher than the wages. Essential sectors, both goods and services, saw brisk employment activity - which is natural in times like these.
Hotel rooms, airfare, and apparel providers/sellers dropped prices. The weak demand also adversely impacted the prices of steel, oil, and agricultural commodities. Oil prices have since bounced back - but not back to their pre-disruption number.
Grocery items saw price increases because the demand surged during the stay-at-home period. Manufacturers also had to pay up extra towards safety protocols, PPE, and social distancing compliance. These extras coupled with rising demand and plant closures spiked the food inflation to 3.5% in April from 1.9% in March 2020.
Image Source: Trading Economics
Despite the Fed throwing "whatever-it-takes" at the economy, I would be wary of buying just about any stock.
Let's face it: the virus is here to stay until a vaccine is found. It's very contagious and deadly for certain demographics. Though many vaccines are under development, we all know that it's going to take a long time before an effective vaccine is invented.
I would completely avoid investing in the consumer discretionary, travel, tourism, aerospace, automobiles, certain commodities, energy, and commercial real estate sectors.
I would consider investing in consumer staples, fresh and local food companies, technology services that enable work-from-home, and home entertainment enabling companies.
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