Investing Lessons from 2020
February 23, 2021 •Austin Bryan, CFP®, Senior Advisor
Introduction by Austin Bryan, CFP®, Senior Advisor
A massive shock to the markets in early March left many questions for our worldwide economy and leadership. While individuals rallied to do their part many were left wondering how our financial system would stand up to such a drop in value in such a dramatic fashion. Memories of the 2008-2009 financial crisis were resonating with many, including the world governments who very quickly took steps to stabilize and renew the economic engine. A few lessons to be learned as we look back at the events in 2020 markets and the potential result of these actions from our partners at Blackrock.
“First the “new nominal” is not simply about our expectation for a higher inflation regime in the next five years. It means stronger growth in the near term, and eventually higher inflation -without the typical rise in nominal bond yields. As a result, we see very different market implications than in the past. Previous episodes of rising inflation were costly for investors, leading to higher interest rates that pressured valuations across asset classes via rising discount rates. Yet the policy revolution means any rise in inflation from today’s levels will be better for risk assets than in past episodes, in our view.
Central banks have signaled they will be more willing to let economies run hot with above-target inflation by changing their policy frameworks to make up for prior inflation undershoots. At the same time, the fiscal-monetary policy revolution –a necessary response to the Covid-19 shock –risks greater political constraints on central banks’ ability to lean against inflation. We see central banks likely curbing nominal yield rises to prevent an unwanted tightening of financial conditions.
Second, COVID-19 has accelerated geopolitical trends such as a bipolar U.S.-China world order and a rewiring of global supply chains for greater resiliency –with less priority on efficiency.
Strategic U.S.-China rivalry looks here to stay, with competition and bifurcation in the tech sector at its core. We are likely to see an increased emphasis in both countries on seeking self-sufficiency in critical industries of the future. China is looking to master foundational technologies such as semiconductors, in which it has traditionally lagged the U.S.
Lastly, COVID-19 has acted as a great accelerator of structural trends that were already in place –an increased focus on sustainability; widening wealth, income, and health inequality; and the dominance of e-commerce. The pandemic has focused attention on underappreciated sustainability-related factors and supply chain resilience. The euro area, for example, is putting green infrastructure and digitalization spending at the center of its economic restart efforts –helping speed up the transition to a low-carbon economy. The pandemic has heightened the focus on inequalities within and across countries due to the varying quality of public health infrastructure –particularly across EMs –and access to healthcare.
And COVID-19 has hastened the dominance of e-commerce and the demise of struggling brick-and-mortar retailers.”
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