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A Rocky Road to a Bright New Year

Despite the pain wrought by the virus, there is finally a light at the end of the tunnel.  The virus forced many of us in the investing world to become armchair epidemiologists since it’s nearly impossible to look at the economy without looking at the virus too.  

When I wrote about the pandemic in the spring, some of the models were showing numbers that seemed impossible, and by September those enormous numbers seemed even more impossible.  Unfortunately, we’re now living in a world where those painful numbers have become reality.  

The good news: we’re on a bright path forward thanks to effective vaccines being rolled out in real time.  A new normal finally seems within reach.     

We’re not looking at a setup for the greatest year the markets have ever seen.  As with the rest of our lives, we’re looking for a new normal, a post virus world that looks more like what we remember.  It will take at least two years for the economy to really move past the virus when you look at interest rates, unemployment, inflation, and volatility. 

Since the recession wasn’t driven by a financial meltdown, the monetary and fiscal stimulus measures were quite potent and effective.  But, these measures come with the price of having to be “unwound” over time.    

The stock market is currently overvalued by almost every measure, which was caused, in part, by irrational exuberance coupled with extremely low interest rates.  We’ll probably see a pull back, and that’s not all bad since we ultimately want assets priced rationally (there really is such a thing).  

As the virus is slowly brought under control, and our lives return to a new normal, there will be an increase in demand for products and services, which will be a source of economic strength.  This demand will push corporate earnings up, and at some point in 2021, stock prices and the underlying corporate earnings will meet closer to long term averages.  

A new normal will take longer in the world of interest rates.  The Fed promised that rates will remain low for years, and history tells us they will make good on that promise.  The downside: we could see real inflation for the first time in decades; however, it should be easy for the Fed to quickly tame any spikes above target.  

From a bond investor’s perspective, it’s important to keep in mind that if inflation goes up 1% and bond yields go up 1%, you’re in the same place, you’re not really enjoying a higher yield.  Inflation will be important to watch given the amount of money “printed” this year.  

After the tragedy of 9/11, things were never quite the same again.  There was a new normal, and with time, the trauma passed, receding into history and memory.  The post-pandemic world is likely to be similar, things will never quite be the same again, but with time we’ll reach a new normal, and this period will fade into memory. 

I wish you happy and boring holidays in the hopes that a subdued holiday season this year will give us many more in the future!  Please follow best practices around all things pandemic, such as avoiding large (or any) gatherings, wearing a mask when you’re out and about, and when the time comes, please get those shots.    

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