If More Lockdowns Happen, These Stocks Are a Safe Bet

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Well, here’s the sort of headline that will get your attention. Dr. Michael Osterholm, an adviser to President-elect Joe Biden on COVID-19, has suggested a nationwide lockdown of four to six weeks to get the pandemic under control.

That will send a shiver down the spine of any business owner or even those of us that are just tired of sitting alone at home with nowhere to go. Let’s walk through the scenarios here and see what the implications for the market might be.

Why More Lockdowns Now?

We’re in a bona fide second wave of COVID-19. New cases are clocking in at more than 140,000 per day, roughly double the old July peak.

Some of this is due to increased testing, of course. We’ll never know what the true infection rate was early in the pandemic because testing wasn’t widely available. But hospitalizations also recently hit a new high, and daily deaths are hitting levels last seen in May.

All of this is happening at the beginning of the cold and flu season, and there is no indication any of these trends will be reversing anytime soon.

There’s been good news on the vaccine front, with Pfizer claiming its candidate is 90% effective at preventing infection. But that won’t be rolled out to the general public until late in the first quarter of 2021 at the earliest.

Osterholm sees these stats, and he’s worried the worst horrors of March and April are about to be repeated on a much larger scale across the country.

What Exactly Is He Proposing?

Osterholm is suggesting a nationwide lockdown in tandem with a massive income-replacement package for workers and small businesses. The idea is that the month-long lockdown would buy us time, reduce the stress on the hospital system, and keep the economy from collapsing until the vaccine is widely available.

Now, a couple points have to be made. To start, it’s unclear whether the federal government has the authority to implement a lockdown without the consent of the state governors. And given how polarized the country is right now, things would have to get horrendously bad before we see any real cooperation.

Furthermore, while President-elect Biden has said he plans to “listen to the experts,” it’s not 100% clear what that means. Biden has not committed to lockdowns, assuming he’d even have the authority to implement them. And I have my doubts as to whether Biden would attempt anything that dramatic.

I’m skeptical a blanket lockdown will happen. But I do expect regional lockdowns, and I expect the economic impact to be drawn out. We’re looking at another several quarters of limited travel, limited group sizes and reduced economic activity.

What Does This Mean for Our Portfolios?

coronavirus lockdowns ending government bankruptciesThe positive vaccine news from Pfizer took the wind out of the sails of the tech leaders that have done so well in 2020. The most beaten-down stocks — think airlines, movie theaters, etc. — enjoyed massive jumps of 20% to 50% in a single day.

I don’t believe those moves are sustainable. While I’ve been expecting value stocks to show signs of life for months, they won’t enjoy a sustained run with the threat of lockdowns back on the table.

Investors will want to stay with what they perceive as “safe,” which right now means tech and larger companies with the financial strength to ride out another round of social distancing.

The market is forward-looking. It discounts future earnings to the present, so we would expect to see virus-sensitive stocks rally before the actual news on virus infections and hospitalizations starts to improve.

But I don’t believe that is what we see here. The rally in virus-wrecked stocks looks a lot more like covering from panicked short-sellers than sustainable buying from bullish long-term investors.

We’ll see. But for now, I would hang on to those virus-proof tech stocks.

Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.

Follow Charles on Twitter @CharlesSizemore.

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