Lingering Headwinds from Covid

By Mitchell Anthony

November 3, 2021


Covid 19 has affected the lives of almost everyone on the globe for the last few years. Thousands of lives have been lost and the personal agendas of everyone on the planet have been altered. Global economies have been wrecked as businesses have had to stop and start because of the pandemic. Most mature businesses and industries survived and some have been big winners while others have been losers.  As we start to see the light at the end of the tunnel we seek to understand what the lingering economic effects from Covid 19 will be for years to come.  How will consumption be altered and how will production of goods and services be changed.  What industries and businesses have found tailwinds from this pandemic that will linger and enhance their outlook for years to come.  Conversely what businesses and industries have headwinds that are lingering and dampening their growth prospects.

The Tailwinds that Have Been Created From this Lingering Storm.

Let’s first start by looking at the economic tailwinds that were created because of the pandemic that are lingering and seem to be here for sustainable time.

Improving operating margins as a result of Covid 19

Several industries have seen substantial improvement in their operating margins as a result of Covid 19. These improvements in margins have come from several different expense categories  that have declined because of Covid 19 related behavior.  Corporate America has learned to collaborate long distance and from home.  Technology has enabled collaboration through the use of zoom media and related applications and this has enabled employees and strategists to feel almost right next to their workmates as they seek to resolve problems and work together as a team.  For responsible motivated employees, working from home has had lots of productive gains. The stress of the freeway and the commute to work is gone.  Energy consumption and wear-and-tear on transportation equipment as declined. Professionals are not distracted by fellow employees who take their mind off their tasks and as a result productivity has improved.  Businesses have found that they can run just as efficiently from a much smaller footprint for their office space.  As a result lease payments are a much smaller item on the income statement. Corporate travel was put on hold and remains uncertain but is also a smaller item on the income statement for the time being.

E-Commerce and Digital Trends Accelerating

We have seen an acceleration in e-commerce and digital trends that seems to be here to stay. People seem to like their newfound skills for their digital tools and ability to sit comfortably at home.

Consumption Up As Consumer Wealth Has Grown!


On the consumer side generally we have found that consumer balance sheets look better today after Covid 19 than they did prior to Covid 19.  This was an unintended error by Washington politicians.

The pandemic forced consumers to do more from home and to leverage the Internet to its fullest.  People who were historically reluctant to embrace e-commerce have now done so and are happily consuming things and ordering whatever they need without a trip to brick-and-mortar stores. The pandemic was a huge tailwind for e-commerce companies like Amazon. This tailwind seems likely to linger and adoption does not show any signs of stalling. The government just spent too much money bailing out businesses and consumers and as a result Uncle Sam has more debt and consumers have more money.  The improved position of the consumer has also come at the expense of landlords, capitalism, and inflation. The big run in assets has caused a further divide in rich and poor and the inequality of wealth is more prominent today.  Those without real estate or equity assets missed the train again and are angry and frustrated.  Undoubtedly we will see redress of some sort (socialism) demanded even more by liberals as a result of this government bailout of the Covid 19 problem.

The Headwinds That Have Been Created From This Lingering Storm Are Notable But Not Overwhelming.

Problems for Consumption!

Consumer spending has been impacted dramatically because of Covid 19. Goods and services have a much higher price today than they did a few years ago causing consumption to pause a bit. Further there is real problem with the supply of the stuff consumers want to buy. The overall level of retail sales is lower because consumers are spending less, but also as a result of a decline in immigration from Asia and Europe. This immigration has been a substantial contributor to retail sales growth in America.  Immigration from Latin America seems to have increased but this is not really helping the economy much because of their modest consumption.

Some consumers are actually not working as a result of Covid 19. There’s been a dislocation of workers due to automation technologies that are being implemented in many sectors of our economy. We see it at the grocery store, restaurants, healthcare facilities and generally in business and consumer services.

Problems with operating margins!

While margins have improved for some selected businesses we have also seen a decline in margins for other selective parts of the economy.  Industries with high quantities of blue-collar unskilled labor have seen substantial wage inflation.  Wages here have been reset to above trend levels that will likely not be recovered.  Further signing bonuses have become common for this strained part of our workforce. Despite the higher wages and signing bonuses these blue-collar unskilled laborers have not performed well on the job and their productivity is in decline for this sector of employment.  The stimulus has made our blue-collar workforce lazy and more willing to sit at home and not work then ambitiously pursuing a high-paying job. As a result the labor force has shrunk due to this as well as early retirements that were taken because of Covid 19.  Some employees were unwilling to risk getting sick in the workplace and as a result retired or at least left the workforce for the time being.

Problems With Topline Growth.

There’s been a topline problem for businesses as well.  Supply chain disruption has affected businesses ability to sell their products. The just in time inventory management system utilized by the American industry was very susceptible to an economy that stopped almost completely and then restarted.  There was no inventory on the shelf when businesses restarted and further a bottleneck developed quickly for businesses needing to get new inventory to the distributor. Entertainment and leisure, commodity production, industrial goods, consumer services, consumer goods, and housing all virtually stopped for a period of time and then have been in a struggle to get restarted for the last year.

Some Companies And Industries Had Both Headwinds And Tailwinds.

Amazon for example has been a big beneficiary of the acceleration of e-commerce and digitization trends.  Amazon’s topline more than doubled as a result of Covid 19.  However Amazon has also been a victim of wage inflation and supply chain disruption.  Amazon sits in the sweet spot of the wage problem as it employs hundreds of thousands of blue-collar unskilled workers.  Amazon missed earnings by the biggest margin ever just recently as a result of over $2 billion of expenses taken on to resize their workforce after utilizing a workforce that was strained and far below capacity during the pandemic. Amazon had great margins last year as a result but now this year’s results will have to be smoothed out with last year’s results.

Restaurants have also been highly affected by Covid 19. Restaurants are also in the sweet spot of wage inflation and further are being hit hard by the sudden rise in commodity prices.  Cheesecake factory and Brinker missed earnings by substantial margins as a result of these sizable problems with wage and commodity inflation.  Revenue was not high enough like Amazon to offset these big increases in expenses.  Amazon has so much market share and not much real competition in the ecommerce industry giving them lots of levers to pull to offset these higher costs for wages.  Amazon will likely implement some price increase for fulfillment work done for 3rd party resellers in the near term.  Restaurant players face fierce competition and conversely cannot raise prices much without losing market share to offset higher costs.

Tailwinds Outweigh The Problems With Headwinds!

Overall it would seem that Covid 19 has positioned our economy for a bit better growth than we were prior to Covid 19 for the reasons stated above.  Much of this positioning has been born at a very large cost (4-5 trillion in new government debt) to the US government which may come back to haunt us in years to come.  However financial markets are still well-positioned for what lies ahead and real estate and equities will continue to tilt higher as the monetary environment stays friendly and earnings continue to grow at a modest pace.  We continue to monitor the inflation problem but still see it as transitory and worry more about the emerging decline in consumer confidence and related fall in consumption turning into a stall in the economy.  The most likely outcome seems like a extended period of modest growth with near zero interest rates.  As we have said many times before this is nirvana for equities and real estate.

We remain optimistic for the performance of our equity heavy portfolio!