Time to Play the Reopening Trade
AMC Entertainment (NYSE: AMC) is back in the news again, but not because it’s a meme stock.
The company announced plans to reopen its movie theaters in New York City next month, providing yet more evidence that the service economy is reopening.
But as the return to normal gets closer, concerns have emerged that it could actually be a bad thing for the stock market.
That’s because of inflation fears. Rising prices put upward pressure on bond yields. And higher bond yields will place downward pressure on stocks.
The pressure on stocks comes from two avenues. Rising interest rates:
- Make bonds more competitive for investor dollars.
- Reduce today’s value of future corporate earnings.
Right now, the most overvalued areas of the stock market are the most vulnerable to rising bond yields. That includes pockets of tech and other growth stocks.
You’ve certainly seen that this week. Just yesterday the tech-heavy Nasdaq 100 Index plunged over 3% before recovering the losses. The index is still down over 4% from its recent high.
But while rising bond yields will challenge stretched corners of the market, there will be massive opportunities elsewhere to profit from a reopening boost.
That’s because inflation will actually be a boon to many sectors (as Ted explained yesterday). Here’s how the dominoes will fall.
Herd Immunity Will Unlock Trillions
As a full reopening nears, three converging catalysts will unleash trillions of spending in the economy. They include:
1. More Stimulus. Massive federal spending packages keep coming. Over $3 trillion in stimulus was approved last year. And now a new $1.9 trillion bill is in the works, which includes another round of direct payments to consumers.
2. Pent-up Demand. Many Americans chose to stay home during the pandemic. Spending on services plunged as a result. Along with stimulus checks, that have led to a surge in the national savings rate. By one estimate, there is $11 trillion in excess cash sitting on the sidelines.
3. Herd Immunity. This is when enough of the population is immune and makes further spread of COVID-19 unlikely. Despite the slow initial vaccine rollout, distribution is increasing and we could see herd immunity during the summer. You can see this in this chart from The New York Times.
That third point — reaching herd immunity — is key to the full reopening of the economy. And that will release the spending floodgates on services.
That spending surge is behind inflation fears. But there’s another way price increases will boost stocks across many sectors.
Don’t Fear Inflation
As Ted explained, inflation doesn’t automatically lead to lower stock prices. In fact, inflation can be good for stocks in the sense that rising price levels can lift sales and earnings.
That will be especially true for sectors such as airlines and energy companies. They will see an incredible boost to their business as we return to normalcy.
You’ve already seen the early signs of a stock price surge with my recent recommendations in related industries, including the SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) and U.S. Global Jets ETF (NYSE: JETS). Those picks are up 35% and 16% respectively since I recommended XOP in December and JETS just last month.
But there’s another way to play the coming splurge on services: bet on a recovery in travel and tourism.
You can do that with the ETFMG Travel Tech ETF (NYSE: AWAY). It holds companies that use technology to serve the global travel industry and will be just one of the sectors benefiting from trillions in pent-up demand.
Research Analyst, The Bauman Letter
P.S. While tech stocks have had a shaky couple of days, and the consensus is that they’re overvalued, this isn’t universally true. There are some players who are not expensive and so they still hold profit potential for investors. And there are some companies that have high valuations but enjoy insatiable demand for their products and services. This makes them equally profitable investments. We actually hold both types of stocks in our Bauman Letter model portfolio. Two have more than doubled returns in less than two years. Click here to join us as we find more such profit generators.