ECONOMIC AND MARKET COMMENTARY

Often, the analogy of sailing is appropriate for investment management. We sometimes counsel clients that crosswinds can be used to advantage. In sailing, crosswinds can be employed to gain speed. With investments, market-related crosswinds can be used to obtain the sort of prices that enhance long-term returns. Never during our firm’s fifty-year history have we seen so many economic crosswinds at play as we have today. Last February, no one could have predicted the large swing in values that would buffet markets, resulting in the slight gains for this year-to-date.

After all this, the strongest crosswinds remain centered around the pandemic and the election. The path forward regarding these issues will be much clearer within months, but we should expect more market volatility during that time. But now is the time for wise investors to consider the longer-term horizon.

In the Spring, the pandemic produced some of the weakest global economic activity in memory.  U.S. unemployment hit 14.7% in April, the highest since the Great Depression. But in August alone, employment rebounded by 1.4 million—the highest ever. Nonetheless, overall economic activity remains subdued and the coming months and quarters will be crucial.

To date, the enormously stimulative central bank responses to these poor fundamentals has reversed the contraction and stabilized exchange markets. This liquid stimulus has produced great short-term demand for equities, bonds and real estate. The coming quarters will be critical as economies and markets are weaned from stimulus. Annual structural Federal deficits of 16% of GDP cannot become normal and trillions of dollars in stimulus cannot persist.

More immediately, national election results will also bear on markets as priorities may well change and the range of potential outcomes (re: taxes, interest rates, dollar value) will likely affect equity and fixed-income returns and therefore, prices.

But as stated above, “now is the time for wise investors to consider the longer-term horizon”.  Potential efficiencies and productivity gains offered by Artificial Intelligence and associated technologies are nearly boundless.  It is a fact that the global pandemic has saddled the world with more debts and a lower intermediate growth horizon, but the creative potential ahead suggests that long-term growth can dwarf these obstacles.