J.P.Morgan Insights (audio)

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.