Mitch on the Markets

August 5th, 2020

Should Your Portfolio Reflect the “New Normal” for Business?

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In the mid-1800’s, the Industrial Revolution landed in America, transforming the nature of work for nearly every American. Workers largely left their farms and homes to take their place on the factory floor, eventually moving onto assembly lines. In the decades that followed, American workers would leave the factories and move into office buildings, as the U.S. evolved from an industrial economy into a service and consumption-based economy.

Today, as if coming full circle, the pandemic may be sending American workers back home permanently.

According to the polling firm Gallup, the number of Americans working from home has at least doubled, but maybe tripled, since before the pandemic hit. A poll in May found that 52% of employed Americans reported always working from home, while 18% said they sometimes work from home. Many corporations are upping the ante even further – a Microsoft survey of managers and CEOs found that 82% plan to implement more flexible work-from-home policies going forward. Google made headlines last week by announcing it would keep nearly 200,000 employees working from home until the summer of 2021, the most extreme position taken by a major corporation to date. 1

There are a few downstream investment implications of this potential “work-from-home” revolution: higher vacancy rates for office buildings in major cities, falling rents in major cities as people move away from densely packed urban centers, less business travel, significantly higher spending on home office equipment like ergonomic chairs, monitors, faster internet speeds, laptops, and so on.

I have noticed quite a bit of investor enthusiasm about getting ahead of these rapid-fire changes. Portfolios are being adjusted to capture trends and to heavily invest in companies building and servicing the digital economy, while reducing holdings in hospitality, retail, airlines, and basically any other area of the economy that does not have a foothold in technology. While I applaud adjusting a portfolio in light of secular changes in the economy, my worry today is that the pendulum is swinging too far, too fast.

Business in America is indeed evolving – fast. But my view today is that too many assumptions are being made about what the economy will look like six months from now, and portfolios are being adjusted hastily in response. There is a growing narrative that workers may never return to offices, business travel may become obsolete, and retail stores will become a relic of the past. While these outcomes may all take place in varying degrees, I think many investors are over-correcting. The ‘new economy’ that many people are imagining is one that will take years or decades to develop.

Companies across the spectrum are learning quickly about the successes and failures of remote work, and what tools and software are ideal for business. In the next year or two, I think we could see an enormous amount of turnover in the tech space, with fortunes being made and lost as innovators and upstarts jockey for market share with new inventions. This is why I think investors should tread carefully – not because I do not believe that changes are coming, but because too many assumptions are being made about who the winners and losers are going to be. We saw a version of this outcome during the dot-com bust, when investors rushed to position portfolios in companies that surely would be ‘home runs’ in the new economy. A majority of them failed.

Bottom Line for Investors

Many companies are moving quickly to adopt new technologies and processes in the wake of the pandemic. CEOs and management teams are shuffling around how they do business, and rethinking organizational structures.

This type of planning will no doubt change how we do business in America. But what I think we will find is that, in time, many of these new processes or software or organizational structures simply will not work. They may need to be reinvented several times over, and certainly will be tweaked along the way. For investors trying to get ahead of the major changes in business today, it may mean giving up a diversified investment approach in an effort to chase companies and trends that do not catch on, or that do catch on but ultimately get upended by a different innovation or technology. In a time of rapid change, sometimes it’s best to take your time.

Disclosure

1 The Wall Street Journal, July 25, 2020. https://www.wsj.com/articles/the-work-from-home-shift-shocked-companiesnow-theyre-learning-its-lessons-11595649628?mod=djem10point

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