Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Trying to Figure Out What Stocks to Buy?
The stock market has been on a wild ride this year. Some equity indices were at all-time highs in mid-February before falling to multiyear lows in mid-March. The rebound since March 23 has been impressive. But how has your portfolio done this year?
Markets react to the balance between supply and demand. When demand increases and supply remains the same, stock prices can rise. When demand falls and supply is ample, stock prices may fall.
In 2020, the demand for products such as toilet paper and hand sanitizer has been high while supply has been low, as evidenced by the empty store aisles. Therefore, by the theory of economics, one would assume the stocks that represent these companies have done well, right?
Let us take a quick quiz examining sector performance.
Consumer Staples vs. Consumer Discretionary
In the first five months of 2020, which sector did better: consumer staples or consumer discretionary?
Consumer staples are generally companies that sell products you need, such as toilet paper and toothpaste. Consumer discretionary are generally companies that sell things you want, such as fancy shoes, or represent a national restaurant chain where you can dine.
Of course, many restaurants and companies that sold fancy shoes were closed in March, April and even in May.
Common sense says the consumer staples sector did better. But if you picked that answer, you would be wrong. By the end of May, the industry that represented consumers’ wants (consumer discretionary) did better than those that represent consumers’ needs (consumer staples). The margin of difference was wide.
At the time of this writing, the Consumer Discretionary Select SPDR ETF (ticker: XLY) was up about 6% year to date, while the Consumer Staples Select Sector SPDR ETF (XLP) was down about 3%. Some stocks that helped the consumer discretionary sector outperform have been Amazon (AMZN), Home Depot (HD) and Target (TGT).
Before trying to make sense of that, let us try another sector comparison.
Real Estate vs Financials
What has done better this year: publicly-traded real estate or the finance sector? Over the last few months, people have been working from home, and speculation is rampant as to how many of us will make this our new norm. For some, dressy attire at the office has been traded in for pajamas and the laptop on the bed.
Meanwhile, financial companies continue to process monetary transactions, and the interest rates on savings accounts are around historically low levels.
This appears to be another situation where there has been a shift in the supply-demand curve and how it could have impacted stock prices.
The stock market says to think again. At the time of this writing, the Real Estate Select Sector SPDR ETF (XLRE) was down 2% year to date, while the Financial Select Sector SPDR ETF (XLF) was down 14% year to date.
It may be easy to forget, but many financial sector firms are facing new competition from internet-based firms, such as PayPal (PYPL) and Square (SQ). Also, while savings rates have been low for a while, lending rates have dropped this year, placing margin pressure on some traditional banks.
The Takeaway
This illustration shows the difference between markets and individual investors. Markets tend to focus on economic implications that are at least six months in the future, if not longer. Individual investors are oftentimes reactionary and focus on current developments. The reference to the empty aisles of toilet paper reflects the current environment and not one that is generally expected to remain in place next year.
Think about this: On your next visit to the store, you will probably want to understand what you are buying before you make the actual purchase. For example, if you go to the grocery store and need some snacks, you may review the numerous selections, the price and how they might complement the occasion before picking up the right bag. Many of us make this assessment when choosing snacks; therefore, chances are that our assessment for a higher-priced item will be much longer.
This is in line with adoption curves which tell us that about 13.5% of us are considered early adopters. The majority prefer a degree of clarity before we make a purchase. This goes for the purchase of snacks as well as stocks.
When you are reviewing how your portfolio has done so far this year, it may be worth reviewing why certain investments were made, not just which investments were made.
