Notes on the Week Ahead

Financial markets sold off last week as investors worried about a possible Russian invasion of Ukraine.  Before engaging in any analysis of what this could mean for long-term investors, three broad points are worth emphasizing.

So far this year, the 10-year Treasury yield has risen from 1.52% to 1.93%.  This increase has been accompanied by broadly lower equity markets, with value outperforming growth and international stocks outpacing their U.S. counterparts.

In the last few weeks, it seems everyone is playing Wordle. Each morning, a UK website posts a new game and you get six attempts to guess the five letter word. If you guess the right letter in the right square, the square turns green. If you get the right letter in the wrong square, the square turns a mustard yellow. If you get it all done in four tries the program says “splendid!” If it takes you six tries, it says “phew”. It’s a nice distraction in what we all desperately hope are the waning days of the pandemic. It’s also not particularly difficult, provided the right answer doesn’t include too many rare letters.

n Saturday, at an average home, on an average road in Maplewood, New Jersey, the realtors staged an open house. Even for a January, this was a rare event and parking was at a premium as dozens of mostly young couples lined up outside, braving cold and Covid. There was a whiff of desperation in the air as the multitude assessed its own numbers. The more experienced in the crowd, though well-armed with bank pre-approvals and hefty down payments, shared in the general pessimism, knowing that the property would go quickly and for well above asking.

Our baseline view of the world does not include a U.S. recession in the next two years. However, it is certainly possible, and investors would be well advised to consider what it might mean for their portfolios. With that in mind, it is worth thinking about what could cause a U.S. recession, the implications of such a recession for financial markets, inflation and monetary and fiscal policy and how assets would fare in its wake.

There is an old and much-quoted saying by the Greek philosopher Heraclitus: “A man never steps in the same river twice” – because it is not the same river and it is not the same man. A very similar observation could be made about investors considering their portfolios as the pandemic, hopefully, begins to wane. Covid-19, and the policy choices it triggered, changed the economic and financial landscape in a significant manner. However, it also changed investors, leaving them, for the most part, with larger portfolios but also with portfolios that are more seriously out of balance.

Growing up in Dublin, my parents were of the firm belief that the streets of the city were safer without David behind the wheel of a car.  Consequently, I first learnt to drive in my early 20s on the backroads and highways of Michigan, with my future wife, Sari, as my instructor.  There were a number of perils associated with this including my tendency to ignore all traffic signs when focused on the task of steering the car or my habit of stalling out due a chronic inability to synchronize the application of the clutch and the accelerator.  It didn’t help that Sari would burst into a fit of giggles at the moments when I put us in the greatest and most imminent danger and was in particular need of quick and level-headed advice.

When our children were very young and they committed some transgression, we had a rule in our house. It wasn’t enough to say sorry. You had to say what you were sorry for. That way, we had some hope that they wouldn’t make the same mistake again.

Despite a disappointing gain in non-farm payrolls in November, numerous recent data points show an extraordinary excess demand for workers.  This excess demand won’t persist forever.  However, it’s important to understand its causes as this can provide some guidance on two crucial questions, namely, how long might it last and how will it be resolved.  The answers to these questions can also help in assessing which asset classes could outperform in 2022 and beyond.

Financial markets tumbled last week as reports spread of a new, highly-mutated variant of Covid-19 which could be more contagious than the Delta variant and which could evade some of the immunity built up around the globe over the past year through vaccinations and infections.