Market Overview

18 March 2020

Stay-At-Home Stocks Gain as Markets Are Still Depressed

While global stock markets remain generally in a grievous situation and they are trying to only temporarily rebound, shares of some companies that are able to benefit from social isolation during the quarantine are soaring up. For example, Peloton Interactive (PTON) share prices have already jumped by more than a third from $18.64 per share during Monday market opening to $25.45 on Tuesday's close. Peloton is a New York based exercise equipment and media company.


Trends towards more social responsibility has forced people to stay at home, even in countries and regions where the local authorities have not closed gyms Some companies that are focused into at-home experiences may, unsurprisingly, perform some growth during the following weeks. More people in the US, Canada and the UK are looking out for rather expensive gear from Peloton. In an effort to attract additional customers, Peloton extended the free trial period for its on-line app from the usual 30 days to 90 days. Many live classes, however, require the proper stationary equipment and the company is maintaining the 30-day trial for its actual bike hardware too. The company also offers a variety of classes for exercises on-demand, like yoga and meditation to calm the mind, and cardio classes for those who are willing to lose weight.


The SmileDirectClub (SDC), which sells orthodontic braces online, surged 15% in one day while Slack Technologies (WORK), which has an instant messaging platform and shares distant-learning resources, gained 25% since the beginning of the week. Slack, Peloton and SmileDirectClub were recently among unprofitable companies and their shares have been volatile with a clear negative bias.


Among the most popular companies, Amazon shares were down 25% from their annual peaks reached this February, losing more than $500 in less than a month. Amazon stocks recovered some loses, as much as $165, over the past two days on the news that Amazon will hire new employees due to a noticeable increase in online orders. The world's largest owner of e-Commerce platforms claimed that some of the necessary home goods were not available in fast access warehouses and that deliveries might be delayed. Amazon announced the employment of 100,000 warehouse workers and couriers in the United States only to solve the problem. The company requires both full-time and part-time employees. Due to the increased workload during the quarantine period, Amazon announced an increase in hourly payments. For example, in the United States, the payment may increase by $2 per hour and in Europe by €2 per hour. Amazon's total expenditures for these purposes are expected to be within the budget of $350 million. Amazon also promised to take all necessary measures to ensure the safety of its employees, including minimising contacts during deliveries. In many cases a parcel with delivered goods may even remain outside the door of the house while the courier moves to a sufficient distance from the customer.


It is appropriate to recall the recent similar cases in China. While most of Chinese citizens were forced to sit at home, the video game service Tencent recorded huge growth in popularity and profits. The lengthy "sentence" of the families at home in the midst of the epidemic sharply increased the demand for mobile games from the Chinese technology company. A significant impulse in game sales increased Tencent's capitalisation by $25 billion by the end of February. Consensus expectations are that by the end of 2020 Tencent's revenue will grow to an all-time highest rate.


The global industry of online games and various applications has grown since the epidemic thanks to a record number of downloads by Chinese residents. More than 220 million downloads were made through the Apple Store during the first ten days of the quarantine, downloads on average jumped by 40% compared to the result of the previous year. Now the same trend might be seen in Europe, the US and other parts of the world. At the same time, we have to remember that the performance of companies with a similar business model may soon slow down as businesses restore their normal activity after the virus wanes. In contrast to the business of mobile games, where direct promotion from the advertising departments of the same companies could suffer as the budgets for different sellers and brand advertisers have been reduced. The increase of the cloud business revenue is also expected to decline.


While some individual companies are benefiting from the general depressive background, stock markets during the previous weeks recorded the worst fall since 1987, and it looks like stock indexes may still follow a downside direction. S&P has downgraded its forecast of China's GDP growth in 2020 to 2.9% from 4.8% earlier and is revising down the ratings of most airlines. Boeing shares are sinking, and the US imposes new duties on deliveries of Airbus planes from Europe. Bloomberg reports that the White House is allegedly discussing a $1.2 trillion stimulus package for the US economy, the New York Times heats up the hysteria by publishing gossip that the US government is supposedly expecting at least 18 months of a pandemic and a shortage of essential goods. Reuters wrote that the US Treasury Secretary Steven Mnuchin warned Republican senators on Tuesday that the failure to act on a proposed coronavirus rescue package could lead to the unemployment surge as high as 20% in the US and lasting economic damage, but this is most likely more gossip since the source is "a person familiar with the closed-door meeting".


At the same time, Mr Mnuching said officially that the US authorities are not planning to close the stock markets for vacation. But if combined altogether those reports indicate at least a desire of certain circles in the media or influential financial structures to continue to heat up the panic in the markets. Meanwhile, no further news is expected from the US Federal Reserve in the coming days: the meeting on March 17-18 was cancelled since all urgent decisions were already made on March 3 and March 15. This means that the market is lacking any guidelines which usually follow the decision on interest rates: namely, forecasts (or the so-called "projections") for at least a year ahead... How long is the Fed going to keep interest rates near zero? The markets could only bet on it now but the Reserve Bank of New Zealand, for example, which also lowered the rates recently, announced that the rates could remain near zero for at least 12 months. So, the Fed is unlikely to back down sooner, and at least the money markets and stock markets will be full of trillions of additional liquidities. Another question is exactly in what way will banks and investment houses use these huge available funds. This could be even more important to monitor, as this liquidity will be available for the real economy and for securities purchases beyond Treasuries and other countries' government bonds.


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