The Game Has Changed

It’s likely safe to classify 2020 as a year that has defied expectations and predictions. Led by COVID-19, the real economy and financial markets have felt the wrath of the pandemic. Since March however, there has been a disconnect between the stock market and “main street,” as the real economy continues to sputter while equity markets (particularly the United States) have risen to new highs. This leaves many “experts” scratching their heads – but is it really that surprising? A recent piece by Ben Carlson highlights the inability of prior playbooks to navigate the current market regime. Particularly due to the easing of monetary policy and increase in fiscal spending, Carlson illustrates the impact of this artificial backstop in propelling equity markets higher, despite the global economic contraction. While dampening one risk in the form of market collapse, other risks creep forward, such as inflation and market volatility. Adding to the uncertainty are investor reactions, which are far from static, especially considering the unprecedented and dynamic nature of elements influencing financial markets. Instead of relying on historical strategies offering diminishing utility, investors would be wise to prepare for a multitude of scenarios as investment strategies of the past could underwhelm in the face of a paradigm shift. While a static 60/40 balanced portfolio has performed extremely well over the last decade, a more nuanced approach to investment management may be warranted in an era where unprecedented monetary and fiscal stimulus has been required to battle the pandemic.