Purpose Investments CIO re-examines how pandemic stimulus efforts and supply shocks have led to a warped global economy
Since the initial impact of the global COVID-19 pandemic last year, governments and central banks have been working to keep their respective countries afloat even as public health and safety measures put a stranglehold on economic activity. But with vaccinations in full swing and businesses reopening, the world is on the path back to normalcy – though investors will have to brace for uncertainty along the way.
“Envisioning the world beyond government and central bank stimulus efforts will be the story of the second half of this year,” said Greg Taylor, chief investment officer at Purpose Investments, in a recent blog post.
As Taylor noted, the pandemic and the ensuing fiscal and monetary stimulus efforts have resulted in an economic environment that’s far from normal. With the sheer magnitude of “free money” pumping up the system, traditional market dynamics have been significantly altered, throwing traditionally reliable market indicators and economic data into question.
One big question mark, he said, is hanging over inflation data. While the prices of goods and commodities are clearly on the rise, what’s less clear is whether this is “transitory” inflation from low-base effects and supply shocks – an assertion that central bankers have made as they keep up their dovish policy stance and activities – or the start of a more sustained trend.
“In a world of just-in-time inventories, broken supply chains are a major problem,” he said. “It makes some sense that this has resulted in some dislocations that caused prices to spike. But will they really just go back to normal in a few months?”
The most recent meeting minutes of the Federal Open Market Committee have reflected an increased openness to “taper talk” – which Taylor said is prudent, though the FOMC may not yet be at the point of getting ahead of the curve and taking the reins on inflation.
The months since last fall’s U.S. election have also seen a dramatic shift in factor leadership. Long-forgotten sectors like energy have come to the fore, while banks have joined other cyclicals in a return to favour among investors, enabling the S&P/TSX to outperform the S&P 500 for the first time in years. Bond yields, as well, have rapidly moved higher.
“Gone are the days of only the large cap technology stocks dominating and everything else sitting on the sidelines,” Taylor said. “In a more challenging environment. do these trends reverse?”
The ascendance of meme stocks, he added, are another ambiguous symptom. Companies traditionally regarded as junk and targeted by short sellers became sudden favourites among an army of retail traders. Whether it’s just another side effect of the historic infusion of cash into the system, or a show of risk-taking that’s symptomatic of a bull market at its peak, is anyone’s guess.
“With so many unanswered questions it’s probably prudent for investors to be questioning what they should do next. Recent trends may result in a shift back to active management,” Taylor said. “Across fixed income and equities, for most of the last decade, investors have been content to just buy the benchmark and go about their lives. But as the world gets back to normal, it’s probably safe to assume there will be some bumps along the road.”
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