Notes on the Week Ahead

In 1895, at the age of 60 and in some financial difficulties, Mark Twain embarked on a speaking tour of the British Empire to pay the bills. He later published an account of his travels in a book entitled: Following the Equator.

The all-boys Catholic school where I spent my formative years was a traditional establishment. The air was thick with chalk dust and a steady tension between a rebellious student body and an establishment which resorted to corporal punishment to maintain discipline. However, a second line of defense for the authorities was the issuance of report cards every six weeks. Twice a quarter, the Headmaster would stride into the class room brandishing a batch of colored cards to be signed by parents and returned. A rare pink A-Card, containing all 8s and 9s would be a cause of domestic celebration. A B-Card, colored blue, would contain some 7s and would generally receive little comment from my parents. A green C-Card, was a more serious matter requiring more elaborate explanations at home. For most of my school career, it was B-cards, but the Headmaster seemed to enjoy my nervousness as he toyed with the cards before revealing my fate.

Last Friday’s April Jobs report was clearly much weaker than expected. On average, analysts expected a payroll job gain of 1,000,000, with the unemployment rate falling from 6.0% to 5.8%. In the event, non-farm payrolls rose by just 266,000 and the unemployment rate rose to 6.1%.

On May 22nd, my wife and I plan to eat dinner at a restaurant. In normal times, such a news item would not exactly make the family headlines. But since the pandemic struck, we have taken a cautious approach and eaten at restaurants only once or twice and then only if outside dining was available. For the last six months, a New England winter has deprived us of even that option. However, on Wednesday, Sari got her second shot and I get mine on May 8th. And so, two weeks later, I can already see myself perusing an oversized menu at a favorite restaurant. Everything will look good and my only problem will be maintaining some restraint. While the bread, the wine, the appetizers, the salad, the steak, the pommes frites and the molten chocolate cake will look equally appealing at the outset, I fear their cumulative implications for a digestive system which has only a distant memory of such bounty.

Memories of the great inflation of the 1970s have faded in the public’s consciousness. Half of today’s population wasn’t even born when inflation stalked the land and, in the decades since, the failure of inflation to reappear has naturally eroded interest in the subject.

On Friday, I had the privilege of speaking at the annual strategic investment symposium run by the College of Charleston in South Carolina. Sadly, like everything else over the past year, the conference was virtual and so I couldn’t revisit Charleston itself. Just to rub it in, the host let me know that it was sunny day in Charleston, with a high expected in the mid-to-upper 70s.

The economy is experiencing the first effects of a powerful double-dose vaccine of broad inoculation and fiscal stimulus. The reality is that forecasts remain very uncertain. The pandemic recession had no modern precedent and so we have no good road map on the speed at which the economy might naturally recover. In addition to this, we have no example of the impact of fiscal stimulus of this scale, aimed primarily at low and middle-income consumers. What we can say is that early signs show the recovery is accelerating, suggesting a faster return to “normal” than many had dared to hope a few months ago. While this is very good news in general, it brings with it challenges for investors in making sure their portfolios are positioned for the very different financial landscape of a post-pandemic world.

It has been, by any reasonable measure, an eventful first quarter. At the start of the year, the pandemic was raging and vaccines had barely begun to roll out. Today, despite a recent tick up in cases, the light at the end of the tunnel is looking brighter and closer. At the start of the year, a very contentious election seemed destined to be followed by political gridlock.

In recent months, falling political uncertainty, two powerful rounds of fiscal stimulus and the rollout of covid-19 vaccines have resulted in a long-anticipated rotation in markets. Since early November, value stocks have outperformed growth, small caps have outperformed large and international stocks have outperformed their U.S. counterparts, with each of these moves reversing a multi-year trend. U.S. long-term interest rates have been at the center of this move, with 10-year Treasury yields rising by almost a full percentage point between the day after the 2020 elections and last Friday.

The pandemic has had an unfortunate impact on my piano practice. In truth, I have never been a promising student - my musical efforts have always rather resembled roadwork on an overused urban highway - that is to say, not so much an exercise in inventive construction as one in increasingly inadequate repair. Still, for some years, my piano teacher would relieve the general ear strain by suggesting some new tune for me to work on.

As a hungry child, growing up in a large family, some forays into cooking were essential. My early rice-making experiments, however, were exercises in frustration. I would start with a large sloshing pot of icy water and, having transported it to the stove with wobbly hands, I’d dump in a bag of rice and wait for results. It seemed to take ages for the water to heat up, as I peered down hopefully at the submerged pile of grain. Eventually, things would begin to bubble and steam, but long before the rice came close to “al dente”, the water had boiled down, exposing an island of uncooked rice, with an acrid burning smell emanating from the bottom of the pot.

The week ahead will be a busy one for market-moving events and economic data. However, beyond the noise, investors will continue to mull two crucial questions: First, how far could interest rates rise and, second, what could that mean for equities?

Long-term interest rates have risen sharply in 2021 so far, with the yield on the 10-year Treasury bond climbing from 0.93% on January 4th to 1.34% by last Friday. This move is a logical reaction to better news on the pandemic, encouraging data on how the economy has weathered an early-winter surge in covid cases, and rising prospects for significant fiscal stimulus. However, given this positive news flow, the bond market may have under-reacted so far, suggesting that investors need to be positioned for further increases in rates as economic springtime turns to summer.

In a year when everything has been different, it was comforting to watch an almost normal Super Bowl with Tom Brady, albeit wearing the wrong uniform, winning yet again. It wasn’t that close a game – Tampa Bay established a lead in the first half and just did what they needed to do to hold that lead to the end.

This Friday, February 12th, marks the start of the Chinese New Year and the Chinese people, like the rest of humanity, will say a hearty good riddance to the last year with hopes for easier times ahead. The Year of the Ox should be better, with vaccines gradually allowing for a return to normal life and China should be able to build on its early economic recovery and resume its very long trend of strong economic growth.

In two weeks, in Daytona Beach, Florida, 40 cars will compete for the most coveted prize in NASCAR. As the cars slowly circle the track in the pace laps before the green flag drops, the noise of engines revving will give notice to all of the speed to come. In a similar fashion, while the U.S. economy has slowed to a crawl over the winter, there are growing reasons to expect a sharp acceleration in the months ahead.

In most decades, there are dramatic events that interrupt the course of history and the last twenty years have seen at least three obvious examples of this. However, more often than not, it is the reaction, in public attitudes and policy, rather than the event itself, that shapes the path taken by society in its aftermath. The horror of 9/11 laid the groundwork for wars in Afghanistan and Iraq. The global financial crisis led to an era of much tighter oversight of financial institutions that, in turn, curtailed lending, contributing to the slowest economic recovery in modern U.S. history.

Last Thursday, ahead of the inauguration, President-elect Biden outlined proposals which, if implemented, could have profound social and economic effects as well as impacts on the broad direction of fiscal and monetary policy.

At the start of a new week and a new year, investors have plenty to think about. Despite the rollout of vaccines, the pandemic has worsened in recent weeks, dragging on the global economy. U.S. stock markets ended at record highs on Friday and both bond and equity valuations look lofty. And in the week ahead, the Congress will certify the election of Joe Biden as President, although with an unusual degree of political acrimony.

In Newgrange, just north of the River Boyne in County Meath, Ireland, there exists a giant burial tomb, constructed, it is estimated, around 3200 BC and measuring over an acre in area . Little is known about the people who built it. However, we can surmise that they had some knowledge of both astronomy and engineering since each year, only at dawn on this day, the Winter Solstice, a beam of sunlight shines through a specially contrived opening above the tomb entrance, illuminating carvings on the walls of an inner chamber.

No parent can ever forget the day their child was born. From that moment on, you’re completely responsible for another, entirely helpless, human being. And so you do everything you can to love them, to nurture them, to teach them and to help them grow. At the start, their problems are little ones and usually you can help them surmount them.

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.

This week, I, like about 20,000 others, will attempt to complete the virtual Boston Marathon. I had signed up again with the Dana Farber Marathon Challenge team to run it in April, after a rather ragged performance in 2019. But then the race, like so much this year, first got postponed and then went virtual. And so, next Saturday morning, I will nervously walk out my front door, turn left and jog off, on my own, into the dawn’s early light.

English, as spoken in Ireland, is full of colloquialisms, phrases which are plain and clear to the local population and entirely mysterious to visitors. Of course, Irish people don’t realize this and, over the years, I’ve become used to the bemused smile of Americans who clearly hear what I say but, equally clearly, have no notion of what I mean.

Washington Hawks flourished in the late 1970s and 1980s, when deficits and inflation were seen as significant threats to the nation. However, their numbers have dwindled in recent years due to persistent low inflation and the rise of populism. The current pandemic recession appears to have dealt a death blow to the species and its traditional habitat has now been taken over by swirling flocks of red and blue doves.

The title of these weekly articles often starts with, “The Investment Implications of…..” This is usually appropriate since almost all big issues have investment implications and the focus of these articles has always been to see the investment environment with clarity.

Apparently, the hard-working analysts at the Congressional Budget Office threw in the towel on Friday afternoon. They were scheduled to release their estimates of the budget deficit for July but, late in the day, the CBO website announced that the numbers would be coming out today instead.

New GDP data released last week confirmed that the 2020 recession has been the deepest in over 70 years, with a peak-to-trough decline in real output of 10.6%. This, of course, was already evident in monthly data on consumption, employment, trade and inflation and has been reflected in a very sharp decline in corporate profits.

Last week, I was preparing for a zoom call with some of our client advisors at JPMorgan Asset Management, by reviewing a list of questions they had kindly supplied in advance, and I came across a particularly awkward one: what has been my biggest investment mistake?

In life before the pandemic, (and it seems like years ago), Sari and I would often drive from our home in Massachusetts to New York for the weekend. The destination was always fun – seeing the kids, exploring new restaurants, catching a Broadway show and sometimes running a road race the next morning to burn off the extra calories. But we had to get there first.

In the week ahead, as has been the case for most of the year, markets will likely take their cues from medical rather than economic data. The key question is whether America will see a second wave in the Covid-19 pandemic. The answer to that question has, of course, profound human and social consequences. However, it also has implications for the economy, for fiscal and monetary policy, and, ultimately, for investment strategy.

In recent weeks, as stocks have rebounded strongly from their March lows, many have asked if the market has come too far, too fast. Thursday’s sharp selloff may have been an expression of that concern.

In the week ahead, America will be focused on the killing of George Floyd and its aftermath. These are difficult days for our country, beset as we are by a pandemic, a deep recession, political division and racial tension.

In the early days of her marriage, my mother tried to achieve the almost impossible goals established by society for a 1960s wife. Apart from tending to the needs of my somewhat Victorian father, she did her best, on an inadequate allowance, to keep herself and a growing family fed and clothed.

On Friday, the Bureau of Labor Statistics will release the Unemployment Rate for April, which will undoubtedly be the single ugliest economic statistic of my lifetime. We estimate that, based mainly on continuing unemployment claims, the number will come in at 15.5%. We also estimate that roughly 19 million Payroll Jobs were lost in the month.

In the classic Roadrunner skit, the Coyote buries one ACME box of dynamite beneath a pile of birdseed, strings the wires to a detonator hidden behind a rock, waits for our hero to arrive and start pecking, and then forcefully pushes down on the plunger.

Every summer when I was growing up, we would spend a week or two on holiday in the West of Ireland. These trips would always start in discomfort, as I was one of a large number of children squished into the back of a small car.

In this uniquely repetitive era for all of us, Saturday marked a first for my wife, Sari, and I. Armed with a sharp pair of scissors and with a manic gleam in her eye, she attacked the task of cutting my hair.

Last week, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a huge package of federal spending and tax cuts, primarily aimed at helping the economy weather the recession triggered by our “social distancing” response to the COVID-19 virus.

The problem with COVID-19 is that it is both sufficiently contagious and sufficiently lethal to exact a terrible human toll. This toll, as can be seen from the mortality figures from China and Italy, can be made substantially worse when the health care system is overwhelmed.

The spread of COVID-19 continues to have a dramatic impact on lifestyles, economic activity, monetary and fiscal policy, and financial markets.