September 2021

Share

LinkedIn

More Quarterly Investor Letters

See More

The Delta variant proved quite disruptive during the Third Quarter.  Governments responded to rising case counts and hospitalizations by re-imposing restrictions that hindered global economic growth.  Supply chain bottlenecks persisted, and shortages in vital inputs and materials affected numerous industries.  The stock market resisted such pressures until September when each of the major indices experienced pull backs of approximately 5%.

The magnitude of the Delta wave significantly increased the number of people who now have some form of immunity – i.e., natural immunity acquired through previous infection or acquired immunity through vaccination.  This means the “susceptible” population – i.e., the number of remaining people who have been neither infected nor vaccinated – is now much smaller.  We expect the smaller “susceptible” population will result in reduced transmissibility of the virus, including new variants.

While we are quite optimistic that the worst of the pandemic is now behind us, our view is not intended to imply COVID-19 will soon disappear.  That would require eradication of the virus.  Instead, this virus is likely to transition from the current “acute” phase to becoming “endemic”.  In epidemiology, endemic is defined as when a virus continues to circulate, but it remains in a “steady state” wherein transmission does not accelerate.  The endemic phase should allow for a gradual normalization of all economic activity.

As the virus transitions into the endemic phase, Merck’s recent announcement of a highly effective oral antiviral is unambiguously positive news.  The drug is expected to be approved before yearend, which should greatly improve the arsenal of available and powerful therapeutics for physicians.  It should be noted that the current standard of care has already significantly improved outcomes over 2020, and the arrival of new drugs should continue to enhance treatment regimens.  The global effort to combat this disease has been remarkably successful, and the breakthroughs reflect a triumph of science.

In 2019, the Federal Reserve was continuing a process of normalizing rates from levels that date back to the Great Financial Crisis.  Certain money market funds paid as much as 2.0%, as an example.  When the pandemic began, the Fed quickly and aggressively injected liquidity into the markets.  In response, benchmark interest rates fell back to zero.  Recently, the Fed indicated that monetary policy will slowly transition away from the emergency measures of 2020.  Initially, this will involve reductions in liquidity support.  Eventually, the Fed intends to resume increasing the benchmark policy rate.

In terms of the timing and pace of the Fed’s shift, much depends on economic growth and ongoing progress with the virus.  Supply chain issues have contributed to recent inflation surges and rising inflation expectations.  Generally, bottlenecks exist because the global approach to the virus has been inconsistent and uncoordinated.  With a sustained drop in cases, supply chain bottlenecks should get resolved.  This should help businesses rebuild overall inventories, which are near 25-year lows.  Market expectations for inflation over the intermediate term also remain anchored around the Fed’s target range, suggesting confidence in the Fed’s policy approach.  We would note that, unlike during First Quarter 2021, the recent increase in bond yields is more likely the result of rising growth expectations.  Likewise, our optimism for improved economic activity is also rising.

Finally, we are pleased to announce that Patten & Patten has signed a lease for office space in UNUM’s headquarters building.  Construction progress has been hindered by materials shortages, but we hope to take occupancy before the end of the year.  We look forward to showing everybody our new office in the New Year.