A perplexing conundrum has recently emerged in the stock market. Last week, the Dow Jones Industrial Average traded at an all-time high. That would suggest that the financial impact of the coronavirus pandemic on the overall economy will soon be over.

At the exact same time, shares of Etsy (NSDQ: ETSY) also surged to a record high above $160. Three weeks ago, they fell below $120 after Pfizer (NYSE: PFE) announced a successful COVID-19 vaccine trial result.

At that time, Etsy was viewed as one of the primary beneficiaries of the pandemic. Millions of Americans have been forced to work and shop from home. Etsy provides an online market for producers and consumers of crafts and other home goods.

Here is the conundrum: If Etsy dropped in value last month on fears that a vaccine would decrease demand for its products, why did it soar last week when optimism over a reopening economy push industrial stocks to record highs?

There has been no recent news out of Etsy to explain its sudden rise in popularity with investors. In late October, Etsy released Q3 results that lived up to expectations. The company recorded a 128% increase in revenue on a year-over-year (YoY) basis and a 520% jump in net income.

That last figure is a bit misleading since Etsy was marginally profitable until this year. At a recent share price of $160, ETSY is valued at 73 times forward earnings. Its price-to-earnings growth (PEG) ratio of 3.5 is more than triple what legendary mutual fund manager Peter Lynch regarded as a fair price to pay for a growth stock.

Shop ‘til You Drop

The justification for a high PEG ratio is that the company will be able to grow earnings at a faster rate in the future than it has in the past. But if the economy will soon fully reopen, it is unlikely that Etsy can continue on its current growth curve.

To be sure, Etsy will report strong holiday sales for this quarter. Consumers are still stuck at home. A vaccine will not arrive in time to allow shoppers to flood the malls safely this month.

Etsy’s guidance for Q4 includes a 70% to 90% YoY increase in revenue. That’s less than its comparative improvement in the prior quarter, suggesting the company is tamping down expectations.

Etsy CEO Josh Silverman tacitly admitted that the company may have trouble maintaining its recent performance. Buried near the bottom of the Q3 press release, Silverman offered this warning: “Looking further out, 2021 is extremely hard to predict and we will be lapping enormous 2020 growth.”

In other words, don’t expect Etsy to continue growing sales at its current clip. One of the company’s biggest selling products, protective face masks, is likely to fall precipitously at some point next year.

The hope is that by then, many of Etsy’s recent converts will continue shopping online instead of returning to stores. Certainly, that will occur to some degree. But with so many people already exhibiting symptoms of “quarantine fatigue,” the abandonment rate may spike when stores are able to fully reopen.

What’s in Store for 2021

I don’t pretend to know how consumers’ spending habits will change in 2021. However, I do know there is a limit to how much they can spend. Whether online or in stores, there is only so much money to go around.

In July, the Centre for Retail Research projected “retail sales growth to be an average of +2.4%” in 2021 after the economy has returned to normal. Admittedly, that is a difficult calculation to make given uncertainties over so many variables.

Two months ago, I provided an easy way to profit from a jump in retail spending during the third quarter. The trade I recommended then, buying a call option on the SPDR S&P Retail ETF (XRT), has gained 250% since then (a call option increases in value when the price of the underlying security goes up).

I think the opposite trade is more likely to pan out over the next few months. This time, I suggest buying a put option on XRT instead (a put option increases in value when the price of the underlying security goes down).

I like this trade because I don’t have to guess where or how consumers will conduct their shopping next year. Instead, I am betting against retailers of all types experiencing a surge in spending.

A Safer Bet

When it comes to consumer spending, a safer bet is identifying companies in sectors that will grow regardless of how the pandemic plays out next year. And that’s where my colleague Amber Hestla can help you out.

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