Which US Sectors Are Most Excited About A Vaccine?

Summary

• US GDP data reveals hospitality and mining suffered most during COVID-19 first wave.
• Around 60% of US workers are employed in sectors that saw above-average GDP declines.
• Most job losses have been in hospitality, energy and administrative services.
• Equity performance during three bounce phases highlights 12 key subsectors that are highly responsive to COVID-19 news.
• These sectors employ just under 20% of Americans and are expected to benefit most from a vaccine.

Introduction

This week, Pfizer provided the first interim analysis of their Phase 3 vaccine study. It found their vaccine candidate to be more than 90% effective in preventing COVID-19 in participants without evidence of prior infection. This promising news means the vaccine will likely be the fastest-developed ever.

And speed matters. From a public health standpoint, over 50mn cases and 1.25mn deaths have been officially recorded. The virus will be the second-largest cause of death this year (behind heart disease) and is 20th on the list of the world’s deadliest pandemics (Chart 1).

Containment measures crucial in halting the virus’ spread have created large short-term economic costs. During Q2 2020, the World Bank estimates that average global GDP (SA) fell 7.8% QoQ, with developed economies recording a 10% drop-off. A seminal IMF working paper also found a 15% decline in industrial production within 30 days of national lockdowns.

With several developed countries returning to national lockdowns and new daily global cases and deaths reaching record levels, economies are again set for a squeeze. Although the economic impact of second and third waves will likely be less than those of wave one, certain sectors will nevertheless continue to struggle.

How Have Different US Sectors Fared During the COVID-19 Pandemic?

Economic activity as measured by gross domestic product (GDP) was around 9% lower in Q2 2020, during the first full lockdown period, compared with Q1. The combination of voluntary and mandatory changes in behaviour reduced people’s consumption, closed businesses and reduced the hours worked by those in employment (Chart 2).

The long-term impact of this lockdown is impossible to know. We cannot be certain how much of the reduction in activity would have happened without a lockdown, and lockdowns can produce positive economic returns if they help to control the spread of the virus. Nevertheless, the short-term declines in production outputs for some industries were severe (Chart 3):

It is well documented that the pandemic significantly affects the hospitality industry. Our findings confirm this, with arts, entertainment and recreation experiencing a 53% QoQ decline, and accommodation and food a 37% decline (Table 1). These sectors are not the largest in the US, but nonetheless account for 4% of total GDP and 11% of employment.

The largest sectors by GDP are real estate, manufacturing of durable goods, and health care, which together account for over a quarter of the total. Despite being the largest sector, real estate only employs 2% of the population, while 14% of Americans are in health care. Out of these three sectors, durable goods manufacturing declined most, falling 14%.

Around three fifths of US workers are employed in sectors which experienced larger-than-average GDP declines. Those hard-hit sectors were also most likely to lay-off workers (Chart 4). A clear exception is retail trade, which experienced a large decline in employment but a relatively small decline in GDP.

Financial Markets

Share prices can give useful indications of how different industries are expected to perform. Having observed a number of key COVID-19 events, it appears some industries consistently react more strongly than others (Table 2).

The three events are (1) the announcement of the first locally transmitted COVID-19 case in the US (26 Feb); (2) the day Pfizer announced the success of its vaccine (9 Nov); and (3) the day which President Trump announced guidelines for the reopening of the economy (17 April).

We take the first event as the start of the US pandemic. The red cells indicate which two-digit sectors (denoted by a number) performed worse than the average S&P 1500 index. In all, total returns in eight sectors performed uniformly worse at 1w, 1m, 3m and 6m horizons. We denote these in red and show their performance in Chart 5.

Notably, the total returns of these eight sectors also responded more strongly than average to both the announcement of a vaccine (Event 2) and Trump’s announcement of an early return to work (this had a negative impact: the US had yet to reach its first wave peak, and it was thought that returning to work would likely drag out the public health crisis).

Delving further into the most affected sectors, we find that twelve subsectors (denoted by roman numerals) are most sensitive to COVID-19 news. These include diversified REITs, which own and manage a mix of property types and collect rent from tenants; hotels, resorts, restaurants and casinos; human resources and employment services; and oil, gas and energy firms.

Many of the sectors that performed poorly on the S&P have suffered significant job losses (Chart 6, blue). Consumer services, which predominantly include hospitality firms, have seen the largest declines. Meanwhile, media and entertainment and also retail (two sectors with relatively strong stock market performance) have also experienced significant employment declines.

Vaccine Implications

Good news on vaccines will be a welcome relief for everyone. But it will likely be especially so for particular US sectors. Based on Q2 economic and labour market performances, these sectors are hospitality, energy, administrative services and manufacturing. This spells good news for as many as 60% of all Americans whose jobs have been at risk during the pandemic.

We can cross-reference these Q2 performances with financial markets. Data from three bounce phases shows that diversified REITs, hotels, restaurants, oil and energy firms, which together employ around 20% of the US workforce, are expected to benefit most from a vaccine. Indeed, there is significant overlap between these sectors and ones that suffered most during Q2.