Notes on the Week Ahead

A week ago, President-elect Biden hurt his foot while playing with Major, one of his rather rambunctious dogs.  Following a CT scan of his injury, it was determined that he had suffered a hairline fracture and his doctor suggested an orthopedic boot.  While it is, no doubt, an awkward piece of footwear, the course of treatment was not controversial.  If, however, his doctor had told him to just walk it off and instead prescribed caffeine and steroids, his competence would have been called into question.  Mr. Biden was clearly injured and in need of support, rather than tired and in need of stimulus. 

Following knee-jerk flight-to-safety bounce as the pandemic struck, the U.S. dollar has fallen in recent months and is now down over 6% year-to-date against the euro and over 4% year-to-date against the yen.  This is a small start on a welcome journey. While some politicians and editorial writers will always proclaim their pride in a “strong dollar”, the truth is that an over-valued currency has been wreaking havoc on the U.S. economy for years, undermining our manufacturing sector, depressing demand for our exports and encouraging protectionist policies which inevitably retard economic progress both here and abroad.

Currently, a 7-day moving average of the number of confirmed cases of Covid-19 exceeds 170,000 while a 7-day moving average of fatalities is above 1,500.  While most people are very worried about this, spotty compliance with mask-wearing and millions of families getting together over the holiday season could well boost these numbers in the days ahead. This will sadly lead to traumatic scenes in hospitals and will also have a significant impact on the economy. 

Of all the challenges facing investors in this blighted year, maintaining a long-term perspective may be the hardest.  In recent weeks, markets have swayed back and forth in reaction to case counts, vote counts, vaccine news and stimulus views, obscuring longer-term trends on economic growth, inflation, earnings and interest rates.  It has also been tempting to ignore the crucial importance of current valuations in driving long-term returns or to underestimate the potential for recently unloved assets to reduce current portfolio volatility and enhance long-term returns.

There was a time, long before GPS or the need to select the accent of the artificial being that would bark driving directions at you, when people consulted road maps. On trips abroad, my wife, Sari, who’s more gifted with fast reflexes than geography, would take the steering wheel while I would unfold an oversized map on my lap, crinkling and tearing at the seams. However, as we buzzed along the road, no matter how urgently Sari would request information, there was always one unavoidable step in providing directions – namely, to first figure out where the heck we were.

A few years ago, just when I’d started training for a big race, I strained my Achilles tendon.  Being an Irishman, I couldn’t, of course, bring this evidence of age and infirmity to the attention of an actual physician.  However, I consulted the oracles of the internet and they were, for once, very consistent in their advice:  “Wait a few days until the pain has faded and then work steadily on ankle strengthening exercises.  Most importantly, lay off running for at least 3 weeks.”

It always requires discipline to look beyond the next few weeks and months and take a long-term view. In the short run, investors remain focused on election uncertainty and how the once-again worsening pandemic, combined with stalemate over further fiscal stimulus, threatens to dramatically slow the pace of economic recovery, following a strong third-quarter bounce.

Turbulence defines today’s investment environment, with great waves of uncertainty surging from the pandemic, the election, fiscal policy and a slowdown in what had been, to this point, a sharp recovery from a very deep recession. But amidst the tumult, investors should not neglect the crucial role of interest rates. The waves of uncertainty should fade in 2021 and, as they do so, the primary role of interest rates in determining asset class returns should reassert itself.

For most Americans, November 3rd can’t come soon enough.

U.S. presidential election campaigns are always hideously long and this one has felt particularly painful, with such a deep divide between the supporters of the rival candidates.  However, recently there has been increased speculation about the grim possibility of the election outcome being contested.  Quite apart from the further division this would inflict upon our bruised democracy, many investors are wondering what this could mean for the economy and markets.

For most of the last 40 years, the United States, like most developed economies, has suffered from a lack of demand for goods and services. This has contributed to a steady slide in inflation. More importantly, it has indirectly triggered recessions by funneling money towards assets, feeding bubbles which have inevitably burst. A lack of aggregate demand has also slowed the recovery from those downturns, inflicting hardship on millions of workers and small business owners.