October 15, 2020

Market recap

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Top Story

Pandemic Accelerates Push for Renewable Energy

Wind and Solar See Growth

With less people commuting to work due to COVID-19, the number of people refueling at gas stations has also shrunk. These changing work routines caused by the pandemic could lead to a 5% drop in energy demand around the world this year, which would be the largest dip in energy spending since World War II.

While demand for oil and coal is falling, capital is flowing into electric energy markets, mostly in the form of solar and wind. According to the International Energy Agency (IEA), renewable energy will fuel 80% of the world’s electricity demand in the next decade.

The rationale is multifaceted. The upfront costs for solar and wind energy are falling, and so are interest rates. Additionally, governments are putting their support behind clean energy. Combined, those factors could translate to a new clean energy boom.

Lasting Change Remains Uncertain

While wealthy nations might be moving away from oil, developing countries will likely still see demand for the commodity once the pandemic passes. In turn, this might lead to a near-to-mid term oil-investment rebound. In fact, analysts expect global demand for fuel to return to pre-pandemic levels by 2023. Forecasts suggest oil and natural gas will hold on to half of the global energy market for the next two decades at least.

However, less capital is flowing into certain energy sources, coal being one of them. In the last five years, investors placed $91 billion in coal. Projections say that figure will fall by almost half in the next 10 years and then shrink again down to $36 billion by 2040. Meanwhile, investment in renewable power generation could grow from $310 billion to $396 billion by 2040. Similarly, investment in energy efficiency initiatives could nearly double in the same time period, growing from $294 billion to $537 billion.

At the start of the pandemic, greenhouse gas emissions fell dramatically, but this trend might not last. In countries where case counts are low and the economy is growing again, emissions are back where they were before anyone had heard of COVID-19.

Electric Vehicle Enthusiasm

To some extent, the shift away from fossil fuels is highlighted by investors’ appetite for electric vehicle stocks. One of the most high-profile names in the space is Tesla (TSLA), which has seen its shares skyrocket by over 450% so far this year. In fact, just yesterday shares of the EV company continued to move higher after an analyst from Goldman Sachs bumped up his price target on Elon Musk's company from $400 per share to $450 per share.

Tesla isn’t the only company investors have their eyes on, and the US market isn’t the only one up for grabs. Shares of Nio (NIO) spiked on Wednesday as well after an analyst at JPMorgan almost tripled his price target for the Chinese electric vehicle maker from $14 per share to $40 per share. Analyst Nick Lai says new energy automobile market penetration in China could hit 20% by 2025—up from 5% in 2019. This latest call sent Nio’s stock 22% higher yesterday and the company has now gained over 559% on the year.

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Apparel Brands Look to Lean on Walmart and Target

Clothing Sales Follow the Foot Traffic

Despite health concerns and constrained budgets, Americans are still shopping for clothes. However, data shows Americans have been skipping the mall and department stores to head to Target (TGT), Walmart (WMT), and even Tractor Supply (TSCO).

Location data shows that foot traffic fell by 40 to 60% at Macy’s (M) stores this summer compared to the same time last year. Meanwhile, stores like Target and Walmart that sell clothing alongside household essentials and groceries were able to retain in-person customers. Target lost less than 10% of its foot traffic in June, July, and August. In fact, Target actually saw a jump in shoppers last month compared to September 2019.

Apparel sales reflect these foot traffic numbers. While sales at Macy’s fell 36% and Nordstrom’s (JWN) fell by 52% last quarter compared to a year earlier, Target sold 11.7% more clothes and accessories than it had the year before. Walmart’s warehouse store Sam’s Club and Tractor Supply Co. also saw a double-digit boost in apparel sales last quarter.

Some Companies Fear Brand Dilution

Many clothing brands have taken notice of the shopping shift and are responding with more offerings in big box stores. Levi Strauss (LEVI), for example, is taking its higher-priced jeans to 360 more Target stores by next fall. Levi’s more affordable Denizen brand is already available at Target. Just last year, the brand experimented with selling more upscale denim in Target stores under the Levi’s brand and was pleased with the results.

Some apparel brands aren’t quite as keen to make their clothes available in big box stores. Citigroup (C) analyst Paul Lejuez said this is because they’re afraid of spreading their brand identity too thin. Levi’s experience, however, proves more shoppers are looking for clothes, including slightly more upscale items, alongside their groceries. In additional evidence that big box stores could aid the apparel industry, Steve Madden (SHOO) executives said on a recent earnings call they will rely on Walmart and Target shoppers to be “growth customers” in the coming year.

Behind the Big Box Boom

Even before COVID-19, foot traffic was falling at department stores like Macy’s and Nordstrom due to the rise of ecommerce. Online shopping has picked up even more during the pandemic due to lockdowns, quarantines, and lingering health concerns.

That said, there are still shoppers who are heading to brick-and-mortar locations. The ones attracting the foot traffic offer essential items like sanitization products and groceries. Instead of separating their shopping, risk-averse consumers are buying clothing and groceries in the same store. This change in habits may endure post-pandemic—especially if brands decide to broaden their offerings in stores like Target and Walmart.

Companies Eye “Groundscrapers” Instead of “Skyscrapers”

Appetite for Office Space Gets Down to Earth

As companies rethink operations during this work from home renaissance, some office workers could find themselves closer to earth when they return to the workplace. Office buildings that sprawl along city blocks instead of up into the sky are finding renewed interest amid the pandemic.

Instead of entering through a traditional skyscraper lobby full of other workers and crowded elevators, companies are eyeing single-story buildings with several entrances. Some are suggesting this alternative may be better during a pandemic where germs spread rapidly in crowded spaces like entry-way turnstiles and cramped cubicles.

Moreover, some brokers and developers think so-called “groundscapers,” or buildings that stretch wider and longer than they do tall, can be better for workplace culture and companies’ connection to their communities. If this trend takes hold, more employees could find themselves working in multi-block office complexes in the years to come.

Office Complexes May Fuel Housing Disparities

Not everyone loves office campuses that take up multiple city blocks—or even a 30-acre park in the case of Apple’s (AAPL) “Spaceship” headquarters. In fact, some say these buildings occupy too much land that could otherwise be used for housing. A homelessness study in Santa Clara County, where the Apple Spaceship is located, revealed that homelessness rose by 31% over the past two years.

Some in the area have said large work campuses like Apple’s are to blame for the steadily growing housing crisis. While sprawling offices like Apple’s might not directly replace housing sites, they can drive up the cost of rent and homes for sale in the surrounding area.

Repurposing Older Properties

One advantage to groundscapers is they can breathe new life into old, out-of-use historic buildings. For example, the Old Post Office in Chicago spreads three full city blocks long and one block wide. It fell into disuse in 1997 and was reborn twenty years later. Workers there now have 2.5 million square feet of office space and ceilings that stretch 19 feet tall, allowing for plenty of space.

When done properly, these redevelopment projects can reinvigorate older buildings with new spirit. “It’s great that new businesses are finding uses within historic buildings,” said Simeon Bankoff, the Director of the Historic Districts Council preservation group. “You are contributing far less to the waste stream.” When this kind of repurposing happens, it’s something executives, workers, and community members can feel good about.

Not-So-Breaking News

  • Goldman Sachs (GS) announced third quarter earnings that blew past analyst expectations. Its bond trading and asset management divisions helped the bank surpass revenue estimates by over $1 billion.
  • Bank of America (BAC), on the other hand, missed revenue estimates and only narrowly beat profit projections after a steep drop in net interest income. Similarly, Wells Fargo (WFC) disappointed. CEO Charles Scharf said, “historically low interest rates reduced our net interest income and our expenses continued to remain elevated.”
  • Zoom Video Communications (ZM) announced a host of new features Wednesday, including a new events platform called OnZoom. In a statement, the company said OnZoom will allow users “to create and host free, paid, and fundraising events." Zoom now has more than 300 million daily meeting participants.
  • Goldman Sachs (GS) raised its price target on Netflix (NFLX) to a new Street high of $670 per share. Netflix reports quarterly results next Tuesday during which Goldman analyst Heath Terry says the company will report "results well above guidance and consensus expectations."
  • Cybersecurity firm McAfee hopes to go public with a $10 billion valuation and stock ticker MCFE. In the IPO terms filed with the SEC, McAfee says it will sell 37 million shares and aim to raise $682 million.
  • Understanding student loan terminology can help you save money and make more informed, confident decisions. Visit SoFi Learn for a guide to the common words and phrases.

Financial Planner Tip of the Day

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Brian Walsh, CFP® at SoFi

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