2020: What Just Happened? Pt. 4
A K-Shaped Recovery
Dissecting the Social Distance Economy
Part of the series: 2020: What Just Happened? A Stock Market Untethered
Refresher: The K-Shaped recovery is a new term coined in 2020 to define how some industries have grown, while others have declined during the Pandemic. On a graph, these contrasting growth profiles resemble the letter “K”.
In a previous post, we looked at Tech’s outsized impact on market indices during the Pandemic. Here, we’ll take a deeper look into the market dynamics of industries that exemplify America’s K-Shaped economic recovery.
As can be seen above, individual industries fared very differently in 2020. The share performance of Technology based industries, like Biotechnology and Internet, have thrived during the Pandemic. However, industries affected by decreased in-person customers have suffered mightily. Some diverse sectors, like Real Estate, appeared relatively flat as a whole, but actually had their own internal K-shaped dynamics.
Internet and Biotechnology Thriving
In 2020, the internet technology and biotechnology sectors boomed. According to S&P’s Select Industry indices — which tracks price-weighted baskets of companies representative of an entire industry — internet-based companies saw their value nearly double in 2020, while biotechnology companies appreciated by 50%. Some of the reasonings behind these massive jumps are simple to follow: sales and valuations are up.
For internet-based companies that deal in eCommerce, like Amazon and Shopify, sales have never been higher and are growing at record rates. For biotech companies, the race for a vaccine and a refocusing on public health has buoyed investor awareness and appetite for both pharmaceutical giants and a surge of early-stage companies focused on genomics and therapeutics. These drivers have created more demand for these two industries, which has pushed up valuations.
To characterize these sectors, let’s take a look at the companies Moderna and Zoom, two of the big winners of 2020. Moderna, of course, is one of two biotechnology companies whose COVID-19 vaccine is authorized for emergency use by the US Food and Drug Administration. Zoom is the video conferencing company that has become the ubiquitous method for companies and individuals to hold virtual meetings during the pandemic.
Moderna, which develops messenger RNA (mRNA) based therapeutics and vaccines for diseases, went public in late 2018 with a listing price of $23 per share. Prior to going public, the Company had raised $2.7 billion from private investors despite not having a publicly approved product on the market. Moderna’s IPO largely flopped upon debut, with its price dropping to $18 by the end of its first trading day, and averaging that same price over 2019.
In 2020, however, Moderna partnered with the US Government to develop a highly efficacious vaccine based on mRNA in just nine months. The vaccine is Moderna’s first FDA approved product on the market. In providing one of the world’s first vaccines for SARS COV-2, the company won billions of dollars in vaccine supply agreements from governments worldwide. By the end of 2020 Moderna’s share price closed at $104, increasing 434% from its $19 price at the start of the year.
Similarly, Zoom had a year to remember in 2020. Zoom publicly listed in 2019 at a price of $36. Its share price quickly shot up to $62 by the end of its first trading day — no doubt a successful debut. Over the rest of 2019, Zoom share price averaged $80, but ended the year at $68 per share as investors had cooled on its growth prospects and worried about increasing competition (I.e., Microsoft Teams, Google Meet, etc.).
However, 2020 ended up being a banner year for Zoom’s growth. As Americans found themselves sent home to work during the Pandemic, average time spent video conferencing more than doubled. However, Zoom was able to beat out competitors by providing the easiest solution to use. Individuals, businesses, schools and governments worldwide have adopted Zoom’s popular solution en masse.
Zoom’s revenue shot up by 4x, with its application being awarded Apple’s iPad App of the Year Award. Investors rewarded this success. By the end of 2020, Zoom’s share price closed at $365, up 437% from its $68 price at the start of the year.
Airlines, Hospitality and Leisure Suffering
In sharp contrast, the S&P indices for Airlines, and Hotels, Resorts & Cruise Lines were down -31% and -23%, respectively. There isn’t really the need to look at individual companies to exemplify the suffering of these industries — they’ve all been affected by the same economic conditions.
The reason for these industries’ depressed performance is rather apparent. The pandemic has made going out, business travel and taking vacations exceedingly hard. Restrictions on group gathering and the ever-present threat of contracting COVID-19 have caused many people to postpone trips, weddings and events.
One telling piece of data is that Americans are traveling far less during the pandemic. How much less? According to the Transportation Security Administration (TSA), from the start of domestic shutdowns in March 2020 to December 2020 airline passengers were down >70% on average compared to 2019. This is a drastic decrease in passengers — about 50 million per month!
And for airlines, fewer passengers mean less revenues, which leads to airlines scheduling fewer flights. Logically, this means reduced scheduling for pilots, flight attendants, security personnel, baggage handlers and so forth.
However, airlines still need to pay their obligations, such as debt payments on airplanes they’ve purchased, pensions they owe to dutiful former employees and other fixed costs like rent and hangar fees. As a result, it’s easy to see that business is down and airlines are losing billions of dollars, causing investors to flee.
While airlines could be seen as an isolated industry, think about the downstream industries that are affected by this decrease in air passenger traffic. Restaurants both in and out of the airport have less patrons, hotels have less guests, cabs have less fares, and live events have less attendees.
The ripple effect amplifies into a wave. It becomes a foregone conclusion that businesses that depend heavily on in-person services, like tourism, hotels and restaurants also suffer greatly. The Hotel & Leisure Sector in 2020 epitomized this cascade.
Across the US, hotel occupancy rates averaged less than 50% in 2020, down from 68% in 2019. The more telling metric of revenue per available room was down 49% from the start of the year. Hotels have needed to decrease prices in order to attract more guests.
As these hotels struggle to survive, they shed personnel costs via mass layoffs and furloughs, which greatly disrupts these impacted employees’ lives. Their lack of income severely strains their ability to make rental and car payments and hampers their participation in the economy. This condition also echoes throughout the restaurant industry.
With most of the US under lockdown in April 2020, restaurants have needed to let go or cut hours for their workers throughout the pandemic. Restaurant weekly payrolls fell by 50% in April compared to just 2 months earlier in February. And though, take-out, economic re-openings and government support has enabled many restaurants to hire back some or their workers throughout year, restaurant payrolls still remain 15% below February.
Heading into 2021, the second wave of the virus threatens to protract the suffering of these industries dependent on in-person services. America’s inability to control the virus during re-opening has led to additional waves of shutdowns and closings, which doesn’t bode well for full recovery in 2021.
Mixed Bag for Real Estate
Real estate exemplifies how their can be internal K-shaped dynamics within an industry. Commercial real estate is suffering, while residential real estate is thriving. This has led to the overall industry being slightly down, but still faring much better than industries like hotels, airlines and restaurants.
Facing depressed demand for in-person services, a significant number of retail businesses, both large and small, have declared bankruptcy, and far more have simply decided to permanently close down business. These closures result in less demand for commercial real estate.
Commercial Real Estate has been severely impacted in 2020, as tenants have needed to break or renegotiate leases at lower terms. Given the economic environment, landlords are unable to find replacement tenants and, ultimately, storefronts remain empty.
Additionally, commercial office space has been adversely affected. Many companies have ordered their personnel to work from home, and have downsized their office space needs. Unused office inventory has started to build nationwide — office vacancy rates jumped to 20% in 2020, up from 10% in 2019.
As commercial real estate is largely funded by debt (i.e., construction loans and mortgages), an important indicator for real estate is the delinquency rate on loans used to purchase commercial real estate. Bloomberg estimates that 50% of commercial real estate loanees were late on their loan payments in April of 2020, and maintained a delinquency rate of 40% from June until the end of the year. And while commercial real estate has been suffering, unexpectedly, residential real estate has been thriving.
In a “freakonomics” twist, US consumers have gone all in on purchasing new homes during the Pandemic. Social distancing has lessened the appeal of cities and has caused many urbanites to discover their need for living space. This consumer behavior shift has precipitated a mass migration from small urban apartments to larger suburban homes.
In response to restrictions on in-person showings, US homebuyers flocked online to virtually tour homes and purchase them without ever physically visiting them. As covered in the next post in our series, American purchased 20%-30% more homes in 2020 compared to 2019.
Low mortgage rates and the behavioral propensity for Americans to upsize during the pandemic drove median home prices by a shocking 12% above 2019 values. This highlights the disparity in the US economy, as a record 20% of Americans missed rent payment in the second half of 2020.
With America’s voracious demand for residential real estate during the Pandemic, many downstream industries actually saw a surprise uptick in business. Americans poured money into furnishing their new homes. Businesses like Wayfair, which sells furniture and fixtures online, and Home Depot, which sells construction materials saw their stock prices rise 209% and 26%, respectively.
Up Next
2020: What Just Happened? Pt. 5: 4 Indicators to Continue Watching — The Economic Trends that Explain the Market’s Optimism
