This is the time of year when investors (and people who write about investing, like me) have to pretend to see the future. We can sometimes appear to be in control of our fate, but as 2020 reminded us, we aren’t. Anybody who correctly predicted the current level of stock and bond markets 12 months ago did so by accident and blind luck; the pandemic, possibly not known even in China in mid-November last year, changed everything.
There is also the risk that something could happen in the last few weeks of the year. My favorite in this genre is The Economist’s “The World in 1990,” published after the Berlin Wall came down, which rated the chance of reform for the heavily embedded communist regime in Romania at -10 out of 10. In the event, Nicolae Ceaucescu, the dictator, had been put against a wall and shot before 1990 had even started.
Over the next six weeks, there will be a row over whether to devote any more taxpayer funds to coronavirus aid, and also over the Treasury department’s announcement that it expects most of the Federal Reserve’s emergency programs to end on Dec. 31 — which provoked an immediate and unusual public protest from the Fed. There could be quite a “cliff” at the year’s end, even if nobody is in quite as much danger as Ceaucescu.
To be clear how much this matters, the money the Treasury made available for use as a backstop, and which it now wants back, propped up a range of sectors. Some, notably municipal governments and small businesses, are sure to come under renewed pressure before the year is out, and that support could prove useful. Some immediate speculation centered on the possibility that the Fed is more likely to expand its balance sheet earlier now, to cushion the damage.
Beyond that, the cooperation between fiscal and monetary authorities during the crisis in March made a real difference. This comment comes from Jeroen Blokland of Robeco:
Only a few times in the last century have we experienced such strong cooperation between fiscal and monetary authorities. This is the main reason why financial markets recovered so strongly after the fastest downturn in history back in March.
It’s not a great idea to end this cooperation just as the pandemic is doing its worst again. Add the non-renewal of benefits at year’s end and a transition to a new U.S. president with little political capital, and January looks like a point of high vulnerability.
So what happens in the next six weeks could crucially change the outlook for the 52 that follow. Even if all goes well, there is reason for humility. To quote Steven Wieting, CIO of Citigroup Private Bank:
We would assume many setbacks in confidence over the coming year. COVID itself presents an immediate economic restraint, albeit less damaging than the first shock. Certain COVID cyclical industry groups within energy and real [estate] were under downward secular pressure before the pandemic.
Much depends on how quickly the pandemic ends, and how politicians manage the trade-offs, as Blokland says:
The Covid-19 outbreak is confronting policymakers with a ‘trilemma’: finding an acceptable trade-off between public health, economy and personal freedom. It is precisely this trade-off and the easing thereof that will shape the economic, market and social circumstances in 2021. …. much is dependent on the timeliness and effectiveness of a Covid-19 vaccine, and the extent to which we ‘return’ to a kind of ‘New Normal.’