This year has had a volatile start, with the S&P500 and Dow Jones indexes posting their worst first- quarter performance (Q1) in history. This was then followed up with the largest one-week (April 6-9) gain since 1974. The forced economic shutdowns have led the IMF to project that the global economy will contract by -3% in 2020. At first glance, this number does not appear alarming, however, it is considerably larger relative to the -0.1% contraction that was witnessed during the 2009 Great Financial Crisis. With that said, the IMF also projects a sharp rebound in 2021 of 5.8% growth, although we caution that the path to “normal” remains unclear.

To nobody’s surprise, the first week of Q1 earnings season has shown that the Covid-19 economic shutdown has led to large drops in revenue and earnings for businesses. The ongoing uncertainty around Covid-19 has put an end to an 11-year bull market. As a result, it has led many investors to wonder what sectors can best weather this pandemic. Below we review two key sectors that we are intently sifting through for investment opportunities.

Consumer Staples

During downturns, consumer staples are viewed as relatively reliable because people are more focused on necessities. These goods and services are considered more “price inelastic”, which means demand is relatively constant regardless of their price. These businesses include grocers and club retailers. These service-based consumer staples are deemed essential services and continue to operate. They are also seeing growth in e-commerce which has the potential to be a future growth driver in a post-Covid-19 world. This sector also includes consumer packaged goods (CPG) stocks. These include everyday products like food, beverage, snacks, household goods, hygiene products and tobacco. Demand for those products have increased as we all spend more traffic and time sheltered at home. Specifically, in a Covid-19 environment, there are few areas for consumers to spend money on and this sector can win a larger share of consumer spending. Within the first week of this earnings season, investors have already seen that a number of consumer staple stocks have announced dividend increases. Companies do not typically aim to raise their dividends if it were not sustainable. Hence, we view these announcements as a reflection of their strong financial standing and further earnings growth potential.

Information Technology

The technology sector is cyclical in nature and demand for their products has historically ebbed and flowed with the health of the economy. However, in this current downturn, technology has been a necessity and viewed as part of the solution. It is hard to imagine how our personal and business lives would be without the benefits from cloud technology, advanced microchips, streaming services, wireless networks, e-commerce, social media, fintech and enterprise software. Covid-19 has solidified the value that these services and products provide, and it is likely to only grow in importance in a post-pandemic world. Consumers and businesses should begin to shift their thinking towards implementing more technology within their operations. For example, should ‘Work-from-Home’ become part of the “new normal”, this will only drive more capital towards investing in technology. In all, many technology themes are secular growers and may be using this Covid-19 environment to solidify existing client relationships, attract new customers, and potentially increase their market share.

Due to the current stock market sell-off, many of these stocks were previously trading at high valuations and can now be bought for much lower prices. With that said, both the consumer staples and technology stocks are not trading at the deep discounts seen in other sectors. In fact, some stocks in these sectors are trading at a premium. Although not all stocks in the sectors can be purchased, we believe some premiums are justifiable if the company has the ability to grow earnings in the current environment and has positioned itself to sustain that growth in the post-pandemic world. We recommend investors review their ‘watch lists’ with their advisor to see if any stocks within the consumer staples and technology sectors should be added.