Stay-at-home stocks battered as market eyes pandemic end

The S&P 500 closed Jan. 24 down about 8% from its all-time high Jan. 4, but stay-at-home stocks have fared much worse as investors increase their bets that the pandemic is coming to a close.

Once darlings of the pandemic's bull market, stocks like Netflix Inc., Peloton Interactive Inc. and Zoom Video Communications Inc. have plummeted since the beginning of the year.

"This whole idea that people were just going to stay home for the rest of their lives is over and these stocks have suffered," said Steven Blitz, chief U.S. economist with TS Lombard.

The initial run-up in stay-at-home stocks banked on Americans working from home, avoiding the gym, and spending a lot more time streaming movies and tv shows on their couches. But with new COVID-19 cases in an initial decline after a spike earlier in January, the end of the pandemic is being priced in, said Michael Crook, chief investment officer at Mill Creek Capital Advisors.

"There is a clear narrative pivot happening in the U.S.," Crook said. "We're clearly on the 'treat it as an endemic' path at a national level."

Market penetration

Peloton's shares, which have fallen more than 81% in the past year, plunged Jan. 20 after reports it was temporarily halting production of its products due to falling demand.

Netflix, which has seen its stock decline 44% from its Nov. 17 peak, plunged Jan. 20 after the company reported that subscription growth was slowing.

Part of these declines can be blamed on market saturation, said Blitz with TS Lombard. If a household did not purchase a Netflix subscription during the height of lockdown mandates, Blitz wondered, when would they?

"How much market penetration can these products really achieve?" Blitz asked. "There's always a limit."

Fed action

The move away from work-from-home stocks is hardly a surprise, analysts said, but it has been accelerated by the Federal Reserve's expected tightening of its ultra-loose monetary policy. The Fed could end its bond-buying program following its meeting on Jan. 26 in order to raise interest rates in March, the first of four rate hikes the market expects in 2022.

"With the Fed becoming so aggressive, the market has turned to quality, dividends and predictable earnings and cash flow," said Paul Schatz, president of Heritage Capital. Work-from-home stocks "check none of those boxes."

Matt Peron, director of research at Janus Henderson Investors, said the Fed's hawkish pivot is putting additional pressure on stocks with relatively high valuation, like Peloton and Netflix.

Many of the most popular stay-at-home stocks need low interest rates to support relatively high valuations, Peron said.

"If the Fed needs to raise rates faster than previously thought, that will compress valuations across the market, but in particular those with the highest valuations," Peron said.