The COVID-19 pandemic has affected virtually every aspect of our lives. Regarding its impact on financial markets, “volatility” seems to be the operative word. A large drop in stock prices early in the pandemic was followed by a gradual recovery that has been marked by day-to-day spikes and plunges.

While the day-to-day swings dominate headlines, especially in today’s 24-hour news cycle, we believe that successful investing requires always staying focused on the long term.

We share our perspectives on some of the major investment challenges and opportunities that are likely to result from this crisis. We focus on five areas: interest rates and inflation; bonds; globalization; healthcare; and sector-specific investment opportunities we are closely monitoring.

Interest Rates and Inflation – A Complicated Relationship

Interest rates were already low before COVID-19. But once the pandemic hit and business activity ground nearly to a halt, the U.S. Federal Reserve dropped its benchmark rate to zero and announced that rates will remain near zero through 2022.

Low interest rates support the economy in a number of ways. Primarily, they make it easier for businesses to borrow and expand their operations. As a result, an extended period of extremely low rates could help many businesses grow, increasing their value and their stock prices. In a “macro” sense, this will help accelerate the overall economy.

But even low interest rates won’t be enough to boost some businesses, such as those in the travel and hospitality industries, until consumer demand increases substantially. This may not happen until people feel confident enough to travel—and that might not occur until a COVID-19 vaccine is developed or we achieve “herd immunity.”

Low interest rates also affect prices and inflation. Typically, interest rates and inflation have an inverse relationship—low interest rates boost economic activity, and when the economy heats up, prices eventually increase, resulting in inflation. But this dynamic likely won’t occur in the current environment. Despite the current (and anticipated) low-rate environment, we are still likely to see a period of disinflation—a temporary slowdown in inflation—until people regain the confidence needed to boost their spending.

Consumers’ reluctance to spend is translating into an extraordinarily high personal savings rate, which has reached 33% in recent months. To put this into context, since 1959, the savings rate has never been higher than 17.3% (Source: Federal Reserve Bank of St. Louis – Personal Savings Rate). While a higher savings rate may benefit individuals, it can be a drag on the economy because that money isn’t being used on consumption.

The high savings rate could, however, boost stock prices. The massive amount of money being saved eventually needs to go somewhere, and with interest rates on fixed income investments so low, some of these savings may end up in the stock market, driving up prices.

Bonds – They Still Have Value Even When Rates Are Low

With interest rates at such low levels, investors can expect only negligible returns on any new bonds. Even longer-term bonds, which typically reward investors for locking up their money for many years, currently offer very low yields. In fact, the 30-Year Treasury yield is in record-low territory, hovering around 1.5%.

Nonetheless, owning bonds can still be useful for investors. For example, bonds can help reduce the impact of market volatility on your portfolio. Also, if you hold your bonds until maturity, you can count on the steady stream of income provided by the interest payments. And if you want to sell your bonds before they mature, you might find that their prices have risen, as bond prices move in the opposite direction of interest rates.

Globalization – Lasting Changes to International Supply Chains?

The COVID-19 pandemic has exposed some major risks related to globalization and outsourcing to suppliers around the world. This is forcing many companies to rethink their supply chains. The pandemic’s disruptive effects on global supply chains may lead to some permanent changes, both positive and negative.

For example, U.S. companies my decrease reliance on international suppliers and increase domestic manufacturing. On one hand, this could lead to growth in higher-paying domestic jobs. On the flip side, this would also likely cause the prices of goods to increase, because it is simply impossible to produce goods as cheaply in the United States as it is in China and other countries.

This dynamic essentially sums up the globalization paradox—globalization is beneficial because it helps to lower consumer prices, but it comes at a price, often in the form of lost American jobs and stymied career paths. It is not clear that “de-globalization” would prove to be less of a dilemma, but it would certainly affect the domestic and global economy in a number of important ways.

Healthcare – Investing in More Than Just a Vaccine

The pandemic has affected the healthcare industry in various, monumental ways. For example, in the near-term, companies involved in testing, tracing, and the potential delivery of a vaccine for COVID-19, as well as those that produce medical supplies and chemicals used to combat the virus, have seen a boost in investor interest.

As the crisis continues to unfold, some of the solutions to this health crisis may involve some surprising players. For example, popular gathering places, such as Starbucks and McDonald’s, may even be involved as testing centers, according to some reports. Clearly, the company or companies that develop a COVID-19 vaccine will reap a major windfall. We expect interesting company-specific investment opportunities to continuously arise as the crisis evolves.

Another healthcare-related issue that has come to the forefront is the movement toward working from home and the increased openness of people to virtual events, including online visits to the doctor. This trend could affect demand for office space, a key component of the commercial real estate market. The shift will also exacerbate the need for better and faster technologies involved in online consultations.

Sector-Specific Investment Opportunities

At Leelyn Smith, a core element of our investment approach is focusing on companies that have built sustainable competitive advantages. From a near-term perspective, the crisis has created immediate opportunities to invest in some blue-chip companies that have decreased in valuation during episodes of panicked selling.

From a long-term, sector-specific perspective, we are particularly interested in companies in the following areas:

Technology – Remote working has, by necessity, become far more common during the pandemic, and it is likely to remain a preferred choice for many employers and individuals even in a post-COVID-19 world. Consequently, many companies focused on cloud computing and cybersecurity should perform well. Technology will also play an increasingly important role in areas such as food and grocery, retail, and healthcare, as consumers grow more accustomed to using technology in these sectors during the pandemic. Finally, innovation and growth in the financial technology space (or “fintech”) should accelerate as a result of the pandemic; as consumers and businesses become even more digitally reliant, many companies involved in mobile payments and transaction-based systems should prosper.

Utilities – With interest rates at historically low levels, utility companies can borrow at lower costs. While their upside is limited as profits are capped by regulators, utilities pay dividends to investors. These recurring payments to shareholders are relatively attractive in a low interest rate environment in which bonds are paying so little. The economy’s increasing reliance on digital technology also should benefit utilities, as more of the economy shifts online.

Medical – Pharmaceutical and biotech companies are sprinting to find a COVID-19 vaccine. This intense research and development effort will slow once the vaccine is found, but the effort has revived interest in the importance of medical research and drug development. Medical supplies, equipment, and healthcare technology companies also are expected to perform well as a result of this crisis.

We’re Always Looking Ahead

During this pandemic, our primary concern is for the health and well-being of our clients and team members, their loved ones, and everyone in our community. From an investment standpoint, COVID-19 will continue to create new challenges and opportunities—and we’ll explore both as we continue with our mission to help you achieve your financial goals. As always, if you have any questions or concerns, please contact us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor regarding your specific situation. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.