“Keep Calm and Carry on” #7
It doesn’t get any easier. Sources of anxiety are coming at us from multiple fronts--the corona virus, politics and issues of social justice. The market action the last six months has seemed to fly in the face of all that angst. The next few months may prove to be more volatile making it even more challenging to remain calm. As always investors need to stay focused on the long view and not let personal concerns drive investment actions.
As our lives are falling into a new corona virus pattern, things can feel almost normal until we put on our mask or search for a restaurant with outdoor seating or schedule a car trip instead of a flight to Italy. Corona virus confronts us in many daily activities. Surely it is having profound effects on the economy and therefore shouldn’t we as investors be concerned?
The corona virus lockdowns and restrictions have serious repercussions for the economy that verge on the draconian for some industries. Some of those worst affected are at the top of our mindshare. Businesses, and their employees, that rely on groups of people congregating indoors will face problems for many months to come, certainly well into 2021. While restrictions are loosening, many of us remain fearful. Depending on your geography and politics, the virus still is perceived as a threat. Many of us are still not rushing out to bars, hotels, and airplanes.
As unfortunate as that is for those businesses, this is not reflective of the entire economy. Those high-profile businesses are not the bulk of the economy. The percent of the labor market involved in leisure, hospitality and retail is about 20% of the labor force but the businesses represent only about 9% of economic activity. Many of those jobs will not come back in the foreseeable future. But as those jobs disappear others will open in residential housing construction and logistics. Hospitality and traditional retail may shrink but opportunities will open in technology, e-commerce, and other work-from-home beneficiaries. We are clearly in the destructive phase of creative destruction, but never underestimate our power to adapt and innovate. Concern about the current situation is understandable, as investors focusing on the future with a broad lens is more productive.
As a source of angst, politics is high on the list of perceived risk. No matter where you place yourself on the political spectrum, this election season has been a cause of elevated emotional responses. This is a particularly difficult area to separate our personal reactions from objective evaluation. Analysis of historical market patterns show that political outcomes do not necessarily match popular wisdom or our perceptions. You can slice and dice the data all you want but the bottom line is that election results are not indicative of future market or economic results. The economy has a life of its own no matter which way the political winds blow.
One frequent source of concern is tax policy. The economy and markets have thrived in a variety of tax schemes. See chart below. It illustrates that regardless of the share that taxes represent of the total economy, growth has been pretty much the same. Changes in tax rates can have short term effects, in the long term, consumers and businesses respond.
Again, innovation and adaptation prevail. It is not so much that politics don’t matter but more that economic momentum is a stronger force. In 2021 the impact of the corona virus on the economy and markets will most likely swamp any impact of election year politics.
Regardless of facts, perceptions can become reality. However, we, as investors, should not assume that our perceptions are reality. Most of the time reality is a lot more complicated. The story of the corona virus will be told looking at a lot more than bricks and mortar businesses. Our fears as investors over the impact of elections are probably overdone. We will survive and, odds-on, thrive.
“Don’t believe everything you think.” Allan Lokos