The Recovery Trade Still Has Legs

Summary

• The retail sales print portrayed a back-sliding economy. But most of the pain was in the food service sector (i.e., restaurants and bars), which should recover as the vaccine is distributed and the economy reopens.
• The underlying detail reveals that online retail sales are up 30% YoY.
• Consequently, equity markets have bid up ETFs backed by these names some 300% since the March lows. We cite ONLN and IBUY in particular.

Market Implications

• We doubt the online sector can keep booming like this, especially as people should have more opportunities to spend money later this year.
• ETFs backed by travel and leisure companies and airlines – such as PEJ and JETS – have lagged the broader market and should outperform later this year as it becomes clearer how quickly the economy can reopen.

Investors continue to fret over COVID’s impact on the consumer, but there are grounds for optimism. Like the December labour report, the latest retail sales print for December was a disappointing -0.7 MoM (versus unchanged expected) and portrayed a US economy backtracking under pressure from the resurgent coronavirus pandemic. But a closer look at the underlying detail reveals that the pain was primarily in the food service sector (as in restaurants and bars), which fell 4.9% versus 0.2% for the goods component.

On a YoY basis, retail sales has largely recovered (Chart 1). Total sales rose 2.9%. Goods (everything exc. food service) rose a healthy 6.3% while food service (about 10% of total retail sales) collapsed 21%. We expect food services will recover steadily as springtime brings warmer weather and the vaccine becomes more widely distributed.

Granted, there has been movement among subsectors. Clothing and accessory sales are down 16%, since few people have needed to buy new wardrobes. Auto sales are up 10% as people turned to cars to avoid public transportation. These kinds of shifts should return to normal over the next year.

There are a couple of other eye-popping details among sectors. Chief among them is the astounding 20% jump in booze sales, almost perfectly mirroring the drop-in food service. Clearly Americans are still drinking as much as ever, but at home rather than in bars. This sector only accounts for 1% of total retail sales, but the symbolism is apt. Somewhat tongue-in-cheek, we suggest that perhaps the best indicator that life is returning to normal will be a decline in booze sales!

The other standout was the 30% surge in online sales. This was driven initially by a need to acquire new things to deal with lockdowns and there being few alternatives with many shops closed. But the gains held steady since even as many retailers reopened for more normal business during the summer, suggesting that there probably has been a seismic shift in how Americans shop.

Equity Markets have Certainly Noticed

Two ETFs backed by retailers with a significant online business massively outperformed the S&P 500 in 2020 (Chart 2). IBUY and ONLN moved roughly in line with the broader market during 2019. Since the market low in March 2020, they jumped 200% and 170% relative to the SPX.

It may be difficult to sell winners like these, but it is also difficult to see them continue to outperform the broader market. In coming months and quarters people will increasingly have new opportunities to spend money on things like travel and entertainment (and eating out!) rather than on stuff to use at home.

The reopening or recovery trade has boomed since the election, when Joe Biden’s victory raised the prospect of further fiscal stimulus to keep the economy going. We noted earlier this month that the Russell 2000 has been on tear since then and has outperformed the SPX over the past year. It should perform more in line with the SPX going forward.

Two ETFs that focus on entertainment, leisure and travel have also done well since the election but are still lagging on a YoY basis (Chart 3). PEJ includes a variety of entertainment and destination companies, and JETS covers the airline industry. Both underperformed the SPX in 2019 by 10-12%, but that gap is now about 20% and 40% worse even with the rally of the past several months.

Of the two, JETS is the more pure recovery play. Air travel is mostly still only 35-40% of pre-pandemic levels, but it swelled to 60% or more during the Thanksgiving and Christmas holiday periods despite entreaties by public health officials to stay home. It may still be an open question where people will go and how they spend their money on entertainment and travel, but there should be little question that demand for air travel will rise sharply when people feel they can travel safely.

The question is more a matter of timing. This trade could jell in the near future, or it could be several months or more before it becomes clear how quickly the vaccine distribution is going and the economy can return to something like normal. Think of it as being in the takeoff queue and you don’t know how many planes are ahead of you.