As much as any year in recent memory, we look forward to the New Year with optimism. As an example of this optimism, our 12th Annual Investment Symposium will be an “in person” event on Thursday, May 20, 2021. Please save the date. Historically, we have held our Symposium during the First Quarter, but it is probable that COVID-19 will continue to disrupt society through April. We are hopeful that a successful, broad-based vaccine roll-out will have enough people protected by May to validate our decision.
The key to market and economic performance in 2021 will be vaccine distribution, a daunting logistical challenge that will experience occasional missteps. Consequently, we expect uneven economic growth characterized by frequent but temporary setbacks, especially during the first half of the year. Economic data will remain quite distorted and volatile because of the pandemic, but by the second half of the year, we expect a gradual return to normalcy.
The economic dislocation created by the pandemic was atypical. Generally, a loss of demand leads to a contraction in supply. In the case of COVID-19, regional shut downs, ongoing restrictions, and temporary “shelter in place” orders contributed to a contraction in supply that led to decreased demand, much of it involuntary. Economic damage was concentrated in the restaurant, leisure, travel, hospitality, and entertainment sectors. Vaccine distribution should lead, therefore, to capacity restoration, especially among those sectors that suffered the most from restrictions.
Numerous “experts” have already published prognostications of the long-term impact of the pandemic. While we acknowledge there could be permanent adjustments, we remain unconvinced by many of these forecasts. For example, it is likely that a certain percentage of the labor force will continue to “work from home,” either voluntarily or involuntarily. This trend could alter infrastructure requirements in various communities. Yet, we are skeptical that the degree of permanent “work from home” situations will be as high as some predict.
We also expect corporate priorities could shift as the paramount objectives of efficiency and productivity are supplanted to a certain extent by security and redundancy. For decades, investors rewarded companies that squeezed out costs, and consumers successfully bargained for services delivered at ever lower prices. It is possible that investors will begin to favor more resilient supply chains, even at the expense of margins. Concepts such as “just in time” inventory management could lose luster to “just in case” storage. As residents of Tennessee realized from the Christmas Day bombing in Nashville, bundling telecommunications services with a single provider to reduce fees leads to vulnerability during extended system outages.
Another source of economic volatility will be the tension between demand that has been “pulled forward” and demand that remains “pent-up”. COVID-19 has no modern, historical precedent against which to make comparisons. Therefore, a push-pull dynamic could ensue as investors rotate among sectors based on their relative sensitivity to both supply and demand restoration. Additionally, we expect temporary spikes in inflation that could, in turn, prompt investors to question the policy direction of the Federal Reserve.
COVID-19 accelerated the Darwinian nature of capitalism as legacy industries already in slow decline, such as many bricks & mortar retail formats, ultimately succumbed to competitive forces. Certain sectors have already witnessed dominance of new business models that leverage technology, facilitate distance, and improve productivity. The pandemic also validated and accelerated the adoption of services, such as video conferencing, that otherwise had been experiencing slow growth. Most important, however, the global scientific effort to develop diagnostics, therapies, treatments, and vaccines highlights, perhaps, the greatest acceleration of research since the Great Space Race of the 1960s. Society will likely benefit for decades, in ways currently unimaginable, from applications developed from advances made during the past year in health care. This prospect has us both encouraged and excited for the future.
Eventually, policy makers will shift their focus to the politically-motivated process of contending with the explosion of public debt issued to support the economy during the pandemic. We do not believe this is a debate that will preoccupy market participants during 2021. Nevertheless, we are concerned that a premature discussion of fiscal austerity could serve to inhibit post-COVID economic growth. Similar to the first few years following the Great Financial Crisis, we expect cash will be hoarded by consumers and corporations alike, despite near zero interest rates. We further expect growth of precautionary savings will lead to slower, “normalized” economic growth and lower inflation. To the extent we experience periods of volatility and uncertainty during 2021, we encourage investors to approach such situations opportunistically.