The Covid-19 global pandemic is wreaking havoc on many (but not all) parts of the U.S. economy. It remains to be seen how quickly the economy can ramp back up once the virus is contained and restrictions are lifted. For investors, I think it’s important not to wait for positive news as a signal that we’re in the clear. As I’ve written before, stocks are likely to rally into the next bull market before economic data actually improves. It’s important to remember that during the last economic crisis the market bottomed in March 2009 but unemployment did not stop rising until October 2009.1
For all of the negative outcomes this virus and recession are creating and revealing, I think it’s also important to consider how the U.S. and global economy are likely to evolve, grow, and strengthen as a result of everything we learn from this experience. As a starting point, consider if any of the below apply to you:
- You are one of the millions of Americans working from home;
- You have children or grandchildren getting lessons through ‘online schooling;’
- You communicate for work and/or with friends and family using an online platform like Facebook, Zoom, Skype, Instagram, FaceTime, etc.;
- Entertainment at home sometimes (or usually) involves a streaming service like Netflix, Disney+, Hulu, YouTube, Amazon Prime, etc.;
- Groceries and other goods are being delivered to your doorstep by your local retailers or Amazon.
Answering ‘yes’ to any of these questions means you’re relying on the digital economy and the United States’ digital infrastructure to live and work. In order for these tools and applications to work and function smoothly, the government and corporations across all sectors will need to make significant investments in cloud, enterprise software, 5G, and all of the hardware needed to make sure a business can hum in the digital economy. For better or worse, the American consumer also needs these investments to happen given that we increasingly shop, connect, and work online.
It should perhaps come as little surprise, then, that the biggest players in technology are actually hiring right now. Apple, Google, and Amazon are all looking for software engineers, data scientists, product designers, and other highly skilled workers. Facebook said this week that usage has soared during this crisis, and given they expect robust activity through the election, they are hiring more than 10,000 people this year for key roles in product and engineering teams. Amazon said that as of April 10, it has 20,000 open tech jobs.2 The list goes on.
The stock market is well aware of the technology sector’s relative strength in the current climate and for the economy at-large. In Q1 2020, the S&P 500 declined -19.60% while the US Technology Sector fell much less, -11.77%. This relative outperformance makes sense given that Microsoft, Apple, Amazon, Google, and Facebook are the five biggest contributors to overall index returns. This performance trend reflects the realities of the current economy, but it is not unique to this crisis. Over the last 10 years, the annualized return of the S&P 500 is an impressive +10.53%, but the Technology sector has posted an annualized return of +14.84% over the same period.3
The transition to the digital economy is ongoing and likely to accelerate in the wake of this crisis, in my view. I could see more companies in more sectors speeding-up their ability to operate online, which means moving to cloud and investing in software and infrastructure. But I could also see astounding and generation-defining changes coming to the biotechnology and life sciences industries as well. Walter Isaacson, a biographer, positions these pivotal moments in history in three phases.
In the early 1900s, discoveries helped spur the invention of transistors, radar, semiconductors, spaceships, GPD, and lasers– all of which are invaluable to the US economy today. By mid-to-late century, the economy was riding the information technology wave, encoding information into binary digits, or bits. Human progress in this field led to the invention of the computer, internet, smartphone, and everything mentioned above that is currently powering growth in the digital economy.
In the wake of this global pandemic, Isaacson argues that we could see a revolution driven by advances in biotechnology. Developing our knowledge and technology in the biotech field could lead to breakthroughs in cancer treatment, vaccines, new medicines to treat viruses and other illnesses, deployment of Artificial Intelligence-powered computer modeling for early detection and treatment, and so on.4 In a time of crisis, it is important to remember that throughout our country’s history, we have often emerged from the worst of times stronger, more resolved, and more advanced and diverse economically than ever before. I don’t think this time will be different.
Bottom Line for Investors
The rapid spread of Covid-19 has put incredible strain on the U.S. healthcare system, and it has also exposed weaknesses in the government’s “grasp of complex supply and distribution chains for life-critical medical equipment and other goods,” according to former Google CEO Eric Schmidt.5 Technology companies like Amazon can help fix this issue. There is also a burgeoning opportunity to further develop additive manufacturing (3-D printing), which in the current crisis is helping some hospitals manufacture respirator valves to use on patients and to potentially save lives. The list goes on.
Many of the ‘evolutionary’ economic changes I discuss in this week’s column have actually been underway for some time across the global economy, but this crisis is making many of us more acutely aware of them. Companies have been gradually moving to the cloud, developing digital infrastructure to run a business, shifting sales to e-commerce, running virtual meetings on Zoom and via webcasts, and so on down the line. If anything, this crisis is likely to accelerate a trend that was already happening, encouraging more sectors to move more quickly in the digital economy’s direction.
At the end of the day, experiencing job losses and a recession causes many folks to think very short term, focusing only on the economic pain happening now. But if we keep focus on the long term and how we will make progress and innovate, it is easier to envision an economy that is bigger, stronger, and more resilient in the years ahead.