In our last blog post, I went over some of the major themes surrounding eCommerce and how they have been impacted and accelerated by the Covid 19 lockdowns. We buy more online than ever before and it shows up the next day like magic in those brown boxes. We have learned to adapt to a more decentralized lifestyle, only recently being able to enjoy family dinners and gatherings again. Throughout the last 6 months, our homes have becomes so much more. Once two separate bases of operations, our homes and our offices have merged into one. In this edition, I’m going to explore this new phenomenon called Workplace 2.0.
Some workers have always had the opportunity to work from home, especially in the tech industry. The ability to write code and share it with your team on a common platform has been par for the course for decades. For those of us in the service industry or other customer facing professions, this physical distancing has provided its own share of challenges. Thankfully, many companies have adapted and just about every task we completed in our office is manageable from home. We are starting to see employees return to the offices, albeit with a much smaller footprint. I believe we are set for a hybrid work environment where we split our efforts between the company office and the home office.
This environment presents new opportunities for workers to not have to urbanize the way we did since the mid-1800s. The industrial revolution saw the mass migration of people from the farms to the factories. Innovation meant the ox and plough was replaced with a tractor, and now the thought of self-driving equipment looks to remove the farmer altogether. Now I’m not suggesting we’re all just going to automate away all the jobs and lead to some sort of Matrix world where our robot overlords run everything. Far from it, one crucial element is that with innovation comes new opportunities. Who would thought that you can make a career out of being a podcast host, a social media consultant, or a professional video game player?
Over the last two days, I had the chance to participate in the US Equity Leaders Virtual Conference, hosted by RBC Capital Markets. Analysts from the major investment sectors shared their thoughts on broad market themes as well as top ideas for the coming year. These conferences used to be done in person and exclusive to top retail and institutional managers. While there were many companies and topics discussed, I harvested a few which I found most compelling.
The first theme, and keeping with our blog title, involves the transformation of the home. During the lockdowns, only so-called “essential” retailers could remain open. While we had to say goodbye to our favorite restaurants and bars, the hardware stores were a frenzy. In the US, comp sales for Q2 surged more than 20% for the likes of Home Depot & Lowe’s. The usual vacation and entertainment budget plus the added stimulus payments from the government caused a shift of more than 900 billion dollars to available retailers. All this to say, with the prospect of being homebound for the long term, families saw fit to pimp out their cribs.
Despite being in a recession, the consumer remains strong. The consumer confidence index in 2009 hit a multi decade low of near 25, but in 2020 we only fell into the low 80s. People remain optimistic that the financial issues we’re facing are temporary and that many businesses are resilient. Personal consumption held up very well thanks to the growing footprint of ecommerce and our ability to order pretty much anything with the click of a button. RBC’s Mark Mahaney calls this phenomenon targeted impulse buying (TIP). Commercial behavior has seen a rise on social media, as companies use targeted advertising to show us more of what we’re interested in. This, in turn, leads to a greater chance of us buying something online. The chart below shows the history of household spending over the last several decades.
Home improvement didn’t just stop there as we saw a surge in home sales and constructions. Families are moving out of downtown cores and into the suburbs. This reversal is one of the first examples of de-urbanization. In Montreal, we see the explosion of growth in places like Vaudreuil, Brossard and Terrebonne. The island is becoming expensive and downtown renters are seeing less use dishing out rent for shoebox apartments. Working from home has led to a need for more space and I expect this trend to continue going forward.
The graph below shows how quickly sales recovered in the US housing market. Families are realizing they need more space if homes are becoming our second offices. This is also encouraging as it points to a short lived recession, rather than a drawn out depression.
While the consumer has held up reasonably well and household debt to income has surprisingly dropped, the fiscal story is whole other kettle of fish. Government deficits have ballooned and debt to GDP is projected to exceed 100% in North America for the first time since WW2. At a time where the government is printing money trying to jumpstart the economy, I have to wonder how we are going to pay for all this. Money doesn’t grow on trees, so these deficits will have to be financed with higher taxes or lower government spending (possible austerity measures). I would have to bet that the former is the most likely option. Trying running for re-election with social security cuts front and center. Believe me, I don’t like it either. My kids will be paying for this and they’re not even born yet! Sovereign debt will become an issue, especially since investors aren’t even compensated for buying the bonds.
Zero or near zero interest rates are the new norm as Fed Chair Powell has stated repeatedly. Good for private equity, not so good when you’re looking for low risk and stable income for seniors.
The yield curve inversion last year did indeed foresee a recession, but maybe not the kind we were all expecting. Spreads on government bonds are beginning to widen again and even investment grade corporate and high yield debt prices appear to be normalizing. For bond ladders to return to their historical average, we would need to see a further selling of longer term bonds. As we’re in an economic trough, I suspect the proceeds would be invested in equities as the stock market continues to recover. Low interest rates have all but erased the concept of the 60/40 portfolio. Inflation eats up what little income bonds now generate, so the move to incorporate more dividend paying equities and other hard assets like real estate and infrastructure help to supplement a portfolio’s generated income. The prospect of higher levels of equities in a portfolio might be off-putting to some investors, but ensuring proper due diligence and diversification helps to mitigate the higher risk that equities have. You don’t make money being bearish, but that doesn’t mean valuations don’t matter when deploying your capital.
It was engines on full and punched to maximum warp for tech shares this year. Now making up more than 30% of the S&P 500, technology has benefitted from the injected money into the market during the recession and also from the work from home trend. Names like Amazon, Apple and Microsoft have doubled from the March lows and continue to set new records. On a technical side, the rise can also be attributed to Japan’s Softbank gorging itself on call options for US tech and others then followed suit. Having had their fill, some profits have been taken off the table but the long term theses for these names remains intact.
Technology and innovation continue to shape every aspect of our lives, especially when it comes to labor. As I touched on earlier, the Industrial Revolution moved us from the farm fields to the factories and then to computer screens. Each of these shifts displaced many outdated jobs, but created many new ones in the process. The rapids shifts can create shortages of labor in new industries, which require new training. Workers are often compensated very well and their skills become in high demand as firms compete for them. This creates a snowball effect until the next innovation comes along.
Sometimes labor shortages arise for different reasons; World War 2 being an obvious example. The other that we’re seeing now is shift as the baby boomers finish retiring. Skilled executives and business owners will be stepping back as the Gen-Xers and Millennials move up the ranks to fill in. If you know anything about demographics, you’ll know that families aren’t as big today as they once were. Homes of 4 or 5 kids have dwindled to 1 or 2. The proportion of workers to retirees continues to drop and governments are looking for ways to compensate. Higher immigration, child tax credits and so one come to mind but they may not be necessary. History shows us that as labor shortages develop, innovation takes hold to fill in those gaps. Necessity is the mother of invention and research firm Fundstrat believes technology could expand to encompass 50% of the US market in the coming decades. Developments in AI, automation and machine learning will be able to help fill the labor needs and replace more mundane tasks. I’m not worried, are you?
If this pandemic has taught me one lesson, it’s not what we do but how we do it. This ties back into the workplace 2.0 theme. Our jobs and daily activities haven’t changed, just the way we go about doing them. Face to face meetings become video conferencing and paperwork became digital with electronic signatures.
I guess since you’re almost done reading this you’re pretty bummed that I haven’t shared any major stock picks. I mean, isn’t that what you were hoping for deep down. Well the pot of gold at the end of the rainbow is still there, you just need a bit of intuition. The themes I laid out and trends going forward tell you all you need to know. Ecommerce, streaming, remote enterprise software, the home fortress, automation and AI will see more and more demand as we move forward. I’m very excited for the future and I believe it to be bright (even if things still seem a bit chaotic). I hope you enjoyed our little journey together, stay tuned for the next adventure. You’re always welcome to come along!