Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 376

When America sneezes, the world catches a ...

After looking dubious for some months, President Trump's chances of winning the next election are roaring back, with his campaign focusing on law and order and re-opening the US economy.

With riots continuing to spring up across the US, law and order has become a powerful platform, particularly among female voters. Added to this, elections are often won or lost on the economy, and there is a growing desire in the US for the economy to open and for workers to return to their jobs. This becomes a stark choice for those idle workers voting to reopen versus remaining in lockdown.

We believe the mainstream polls underestimate Trump's support. The bipartisan divide in the US is strong, and many voters are unwilling to publicly admit their support for the President.

A K-shaped recovery?

Another factor likely to have an impact on the election outcome is, of course, COVID-19. Despite crossing the 200,000 milestone this week, US deaths relating to the virus have dropped materially from a peak weekly count of 17,000 (according to the CDC data) to around 5,000. It is a little surprising that the media has not focused on this statistic, instead preferring to focus on the infection rate. This too has been falling, with average new cases per day falling from above 60,000 in July to around 35,000 in mid September.

We are not sure COVID-19 infection rates will ever hit zero, but maybe they don't need to. If we can learn to live with COVID-19 while opening up business, we believe the economy – including ours in Australia – has a good chance of continuing its recovery.

The discussion about the ‘shape’ of this continues. Will it be a V, W, or U? Perhaps it will be a K – that is, good for some and bad for others. It is difficult to imagine a more conducive environment for e-commerce businesses, with large numbers of people confined to their homes for business, consumption and leisure. This has, therefore, created an enormous inequality between those businesses that are leveraged to e-commerce and those that are not.

Changes afoot at the Fed

The other key support for markets is US monetary policy, with the US Federal Reserve recently announcing a new framework. It's yet another evolution in thinking for the Fed, which has proven increasingly willing to use the tools at its disposal to engineer a recovery in the economy.

The framework suggests that monetary policy during economic expansions should aim for inflation moderately above 2% for some time, providing a boost to employment and economic growth. This contrasts to the Fed under Paul Volcker in the early 1980s, when interest rates were quickly raised to record highs to crush runaway inflation (which was running above 12%) and euphoric commodity, housing and bond markets. This current shift in policy towards a greater tolerance of inflation suggests lower rates will persist for some time, with no pre-emptive tightening; which should support gold, commodities and other inflation-benefiting stocks, as well as equity markets in general.

If history is any guide, when the Fed makes a change of this magnitude, it's worth paying attention. We have long believed that during periods of market dislocation, the actions of central banks are the key drivers of market returns. If a deal on a fiscal stimulus plan cannot be agreed between the Republicans and Democrats, it is likely that the Fed will continue to do the heavy lifting. 

‘Unprecedented’ indeed

In February and March, COVID-19 and the subsequent economic shutdown spooked investors so much that they sent the market vertically down for a total drawdown of 36%. To be fair, no-one living today has experienced a pandemic on this scale.

As time has marched on, however, it is looking increasingly likely that the pandemic was more akin to an exogenous shock than a structural downturn – a black swan event which may see the economy recover faster than most expect.

 

Kristiaan Rehder is a Founder and Portfolio Manager at Kardinia Capital. This is general information only, and has been prepared without taking account of your objectives, financial situation or needs.

 

RELATED ARTICLES

Interview: How markets saved companies with zero revenues

20k now or 50k later? What’s driving decisions to withdraw super?

The surprising resilience of residential housing and retail

banner

Most viewed in recent weeks

My lessons from five decades of investing

As she retires after 47 years as a portfolio manager, Claudia Huntington explains the art rather than the science of investing, the value of a great leader and culture, and the insights she gives to new colleagues.

20k now or 50k later? What’s driving decisions to withdraw super?

The amount of retirement savings withdrawn under the Superannuation Early Release Scheme has surprised many. This comprehensive survey of thousands of Cbus members explains their motivations.

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

One last hurrah for the 60/40 portfolio?

The 60/40 diversified portfolio has been the mainstay of the superannuation industry for decades. But it is built on a fundamental principle of defensive bond returns, and its time is nigh.

YourSuper will save $17.9 billion! Surely you’re joshing

In Budget 2020, Josh Frydenberg announced a performance comparison tool and fund stapling to save Australians $17.9 billion over 10 years. But too many moving parts make results highly cyclical.

The elusive 12%: is superannuation at a turning point?

Such is the concern among unions and Labor about Government plans to undermine superannuation that an 'Emergency Summit' was called this week, and pioneer Bill Kelty evoked a social commitment.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020
  • 6
Retirement

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

Shares

Tech continues to run on rising prices not profits

The global tech run paused in September but the boom is driven by rising prices rather than actual profits. It will end when global confidence in the prospect of endless monetary and fiscal stimulus runs out.

Investment strategies

When defensive assets become indefensible, turn to tech

During COVID-19 and the economic recession, we are seeing a surprising new entrant to the defensive sector grouping. Technology shares have been behaving a lot like defensive shares such as food and utilities.

Interest rates

10 reasons low interest rates may limit growth

Ultra low interest rates could be counterproductive for economic growth. Policymakers need to rely less on monetary stimulus and be mindful of the side effects they are creating, especially for retirees and savers.

Financial planning

What the RC, Budget and Keating mean for aged care

Although the Aged Care Royal Commission (with Paul Keating) and Budget announcements gave the aged care sector high profile, the welcome 'granny flat' changes came with inadequate extra Home Care Packages.

Investment strategies

Is currency exposure an unwanted risk or source of returns?

As more Australians invest overseas, currency exposure represents a new risk. 50% hedged, 50% unhedged was once a popular ‘least regret’ approach, but there's a move to currency as a return source.

Shares

High growth and low rates incompatible with current share prices

The unrealistic value creation through lowering discount rates while assuming high growth shows a sensible link is critical. Interest rate assumptions need as much valuation focus as the cash flows of the business.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.