Gaining Perspective on the Current Market
by Tom Mason
The medium was at least part of the message delivered by Greg Giffin at his webinar titled “Gaining Perspective on the Current Market” on April 29. With Nova Scotia in the early stages of a third lockdown Giffin, Halifax-based vice president of C.I. Global Asset Management, took to a medium that has become a vital part of everyone’s life in recent months – Zoom – to deliver a message steeped in positive economic news.
The outlook offered up by Giffin was surprising for an economy so recently ravaged by the global COVID-19 pandemic. In fact, just 13 months earlier the world had experienced the worst economic crash since the Great Depression. But despite an uncertain period that could have marked a severe setback for investors, a couple of positive developments early in the pandemic had a massive impact on the global economy.
First off was the way that governments around the world responded, taking unprecedented steps to prop up their COVID-ravaged economies. ”The numbers would have been dramatically worse had governments not provided support to those who were displaced,” said Giffin. Government support meant that people were able to pay their bills and certain sectors of the economy were able to continue as before despite being massively impacted by the downturn.
The bailout numbers are staggering, according to Giffin. The global economy is roughly around $90 trillion in total value. Governments around the world stepped up with about $20 trillion injected into their economies. That massive influx in cash meant that consumers around the world were able to continue to live comfortably without going into debt. In fact, in many places the opposite happened. “With consumers stuck at home, savings were expanded globally at a significant rate,” said Giffin. “The savings rate in 2021 was twice the rate of 2020. The U.S. savings rate was 6.5 percent going into 2020. By the end of 2020 it had crossed 14 percent.”
That means the U.S. currently has about $2 trillion in extra savings –– savings that would not exist if not for the pandemic. In Canada the number is around $90 billion, with the U.K. looking at about €200 billion in extra savings. “There’s a lot of excess money sitting in savings accounts around the world,” said Giffin. “People will be anxious to spend at least some of that money doing things they haven’t been able to do since the pandemic began –– things like travel, dining out, taking their families to theaters, concerts and amusement parks.”
Technology stocks prospered early in the pandemic, driven by companies that benefited from a locked-down world: E commerce, online goods and services, home delivery services, home fitness companies like Peloton and sales juggernaut Amazon all saw their fortunes rise directly as a result of the pandemic. At the same time COVID-19 accelerated the digitization of the world by years.
Government bailouts and the advancement of technology remained the two big economic themes from April until the end of October 2020. Then a critical thing happened: early on the morning of November 9, 2020, Pfizer and Biontech announced they had developed a successful vaccine using a new mRNA process. Suddenly the traditional sectors of the economy that had languished for the last eight months began seeing their fortunes rise again. “Energy, financial, consumer discretionary and real estate all became the benefactors of what has become a reopening theme,” said Giffin.
The Pfizer announcement was just the beginning. Within weeks, four vaccines were on the market – unprecedented in a world where vaccine development has previously taken years. That level of scientific achievement is unheard of, said Giffin. “This was a critical development in terms of giving us hope for a return to a somewhat normal state,” he said. “Whether or not COVID-19 is something we have to learn to live with, having vaccines has given us a much more positive view of the future.”
Giffin warns that the recovery won’t be equal for all economies. Some will grow faster than others. But the news is mostly positive. “If things continue on at the pace that we’re going, the growth rate for 2021 will be the highest we’ve seen going back to the 1970s. And even in 2020 as we work through this onslaught of liquidity flowing through the system as people continue to spend the money that’s piled up in their bank accounts, growth rates for 2022 are still looking like the highest we’ve experienced in the last couple of decades.”
In terms of time –– not magnitude –– 2020 was the most dramatic economic decline in history. “ It took less than a month for the market to fall 30 percent,” said Giffin. But also unprecedented was how quickly the recovery took place. “By August we had recovered all of the losses on the broader market. By the end of 2021 in most nations around the world we will have grown, from an economic perspective, above where we were at the end of 2019. So while it was a very significant and sharp decline, much greater than the recession of 2008-2009, the recovery will be much quicker as well.”
There are risks to be sure; not the least of which is the possibility that the global COVID-19 pandemic still has a few surprises in store for us. The big risk, according to Giffin would be a unified rise in cases and a return to government shutdowns. “That would create volatility,” he says. The other big unknown is the direction that interest rates might take. “From a peak in 2019, we saw a dramatic drop (in interest rates) in 2020,” says Giffin. “In early 2020 the market became fearful, the bond equity market sold off and investors moved into bond market. That cut rates to effectively zero. Any significant movement in the bond market could create uncertainty in equity markets.”
There are a number of possible scenarios. The most likely is that the recovery will continue and we’ll return to some normality as the vaccine rollout accelerates around the world and savings that have built up in bank accounts get spent. It’s a scenario that has already played out five times since World War II in markets that have declined more than 30 percent. “They are up on average about 40 percent the year after the decline, and in year two another ten percent,” says Giffin. “There are a lot of reasons to believe that we might go through something like that. Of course there will be some bumps, choppiness and volatility along the way.”
“In uncertain times like we are today, the most important thing we can do to improve our likelihood of success is to work with a trusted advisor to clearly define your goals, revisit your financial plan, and adhere to a disciplined approach to investing.”