Central banks have been aggressively raising rates to slow economic activity so that global economies do not get caught up in a 1970s style wage and price spiral. While their aim is admirable, central bankers may be using a playbook that is not appropriate for the current situation.
Covid-19 was center stage throughout 2020 and will continue to frame expectations in 2021. The rise of new variants, the rollout of vaccines and the sentiment driven upward trajectory of financial markets, are influencing investor psychology. The overriding question being whether financial markets have gotten ahead of themselves.
We think about money in terms of paper currency, coins, debit, and credit cards… anything that can act as a “medium of exchange” to purchase goods and services, settle debts, and meet financial obligations. Fiat money is government-issued currency that is not backed by a physical commodity but by the stability of the issuing government. With Fiat money, governments, through their central banks, have unhindered access to the printing press. Treasury can expand or contract money supply to stabilize employment, the economy’s growth trajectory and inflation.
For the record… I am an optimist! Although I prefer to think of myself as one who seeks out constructive elements in harsh realities.
But that said, consider our optimist psyche as a “caveat emptor” as we review some strategies for the road less travelled, and examine the vaccination roll out, the post-COVID economic recovery, and possible ways to close the chasm that is the great political divide. And along that road, we wanted to examine SPACs as an emerging investment vehicle, which some of our in-house pools now hold.
Last week’s assault in Washington illustrates the rage underpinning the chasm dividing the U.S. political landscape. Depending on where you get your information, the riots / protests were the work of anarchists, thugs, seditionists, or patriots and everyday Americans protesting a stolen election.
On the margin, we are bullish on the outlook for 2021. There will be bumps, bruises, changes in the timeline but, overall, 2021 will end as a beginning of the return to normality, and that should play well for the financial markets.
I intend to stay awake this New Year’s Eve. Not so much to welcome in 2021 but to make sure 2020 fades into oblivion. I would like to say that 2021 will be a better year but that would be redundant. It is hard to imagine it being any worse!
What I can say is 2021 may be better than many base case scenarios are suggesting. Bay and Wall Street watchers are cautiously optimistic, once we get through North America’s dark winter. It is clear, as COVID waves intensify, that a return to normalcy will rest on the efficacy of the vaccine. Which, by the way, some 40% of Americans say they will not take!
According to most polls, former Vice-President Joe Biden has a commanding – almost insurmountable – lead as we enter the last four weeks of the US Presidential election. Some have gone as far as to suggest we will see a blue wave where the Democrats not only take the Presidency but also Congress and the Senate.
From our perspective there are two main factors influencing financial markets: 1) the seeming disconnect between market performance and economic reality and 2) the impact of the US Presidential election with potential constitutional challenges that go beyond who wins or loses.
We will explore these issues in our commentary and share some of diversification techniques intended to protect client portfolios within the context of the long-term economic realities and the potential presidential outcome.
You can be excused for thinking that equity markets have gotten ahead of themselves. As of the close of trading on Monday June 8th, 2020, the S&P 500 composite index had recovered all year-to-date losses. Even more impressive was the performance of the NASDAQ 100 stock index which set another all-time high. That was, of course, before Thursday’s sell-off that highlighted the fragile foundation underpinning equity markets.
