Investing For a Long, Slow Recovery

With recent events unfolding, including increasing COVID-19 cases as the country reopens, some slowing of states' reopening in response to major spikes in cases, store re-closures (for example, Apple's announcement on Friday), delays in the cruise industry resuming operations, etc., it's looking like the recovery will be slow and bumpy.  Economic news has been mixed, with retail sales growing faster than expected and a good jobs report a couple weeks ago, followed by reports of more cases and higher weekly unemployment claims than anticipated last week.  While many economists agree the worst is behind us in terms of the unemployment and other major impacts of the almost three month shutdown of the economy due to COVID-19, there is less agreement about the future path of recovery. 

What seems most likely from what I have read is a long, slow recovery that looks almost like a Nike whoosh symbol.  It could take a year or even longer to fully recover and we may still at that point have elevated unemployment since some jobs simply may not come back as entire industries restructure their operations.  The US Federal Reserve has provided a tremendous amount of liquidity and market support, creating a "floor" under asset prices unlike anything we have seen in history.  However the stock market continues to be very volatile, rising and falling rapidly depending on the news flow from day to day. 

There are some sectors of the economy benefiting from this environment, most notably are the technology stocks and in particular the larger "FAANG" stocks, which have outperformed the rest of the market pretty much since the crisis began.  Many of these companies have great balance sheets, plenty of cash and cash flow, solid growth business models and have benefited greatly from the "Work From Home" experience and will continue to benefit as the economy recovers.  An easy way to invest in this trend is to buy the QQQ ETF, which represents the Nasdaq 100, the top 100 stocks in the Nasdaq index (non financial) by market cap.  QQQ also pays a 0.66% dividend yield.

Another trend seems to be pharmaceutical companies, which can benefit from the search for a COVID-19 vaccine, but also from healthcare trends in general especially as pent-up demand for elective procedures kicks in as COVID-19 subsides.  These stocks, which tend to pay higher dividends are also more "defensive" in a volatile market.  One of my favorite pharma stocks is Abbvie (ABBV).  Abbvie recently completed an acquisition of Allergan which helps broaden its product line and provides even more future cash flow from existing drugs.  The current dividend yield is 4.88%, which is among the best out there and the stock has been steadily rising since the completion of the merger.  In the current zero interest rate environment, that's an excellent yield with very little downside and a lot of upside to the stock (analysts' average price target is $101 and recently trading at $96.50).

Since it's pretty obvious that COVID-19 will be with us for some time, stocks like Clorox (CLX - 2.04% dividend yield) that help us keep our homes, offices and other places we frequent clean and virus-free, are likely to continue to do well at least for the next year or two.  Also, with people spending more time at home and not taking vacations where will they spend that extra money?  Some analysts think Lowes (LOW - 1.64% dividend yield) and Home Depot (HD - 2.43% dividend yield) will benefit from a home improvement trend.  Being deemed "essential" during the nationwide shutdown, these companies stayed open and continue to build on their key strengths of size and scale.  They also benefit from a robust housing market - see below.

One surprising recent trend is the strength of the housing market, likely due to super low interest rates and a desire by some people to relocate from cities to suburban areas due to COVID-19 and recent civil unrest.  This is also helped by being able to work from home, with many companies being very flexible about this - a trend that may continue after the pandemic.  A beneficiary of this trend is Lennar (LEN - 0.83% dividend yield), one of the largest home builders in the nation and has recently traded lower since it's recent (but very good) earnings announcement.  Average analyst price target is almost $71 and stock closed at $59.90 on Friday.

Any stock that pays a safe, high dividend is good in this low-interest rate environment as part of your portfolio, but some are better than others as noted in my recent post here. 

Stay safe, healthy and positive.
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.
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