2020: a year in review
November 26, 2020
To say that 2020 was an unusual year would be an understatement - a pandemic, leading to a health policy induced recession, culminating in a U.S. election result which remains contested (although considered decided by most).
On a personal level, the coronavirus has proven to impact almost every aspect of our daily lives in some manner, and during this time of uncertainty, we appreciate your confidence and look forward to 2021 with the hope for progress for the effective distribution of a COVID-19 vaccine. While we look to science for positive developments on a vaccine, we recognize that there is no date for when our daily lives may return to normalcy, and therefore, no precision as to when the economy will function as it did prior to the pandemic. To that point, we remain committed to overseeing your investment portfolio guided by the risk management framework that has guided us through 2020 so far.
Since our last note, Democratic candidate Joe Biden has been declared the winner of the U.S. election and the House of Representatives has remained in Democratic Party hands. Although we will not see final results for the Senate race until early January, all indications are that the Senate will remain controlled by the Republicans, contrary to most pre-election polls. In our view, this is a very positive set up for the market as the House/Senate gridlock will likely keep pro-business measures implemented over the last four years in place and reduces the likelihood of a significant corporate tax hike. Lastly, with this split, we expect less risk of disruption from any new legislation. Industries like technology, health care, and finance, may be less encumbered than they otherwise would have been under a Democratic House and Senate scenario.
Central banks globally continue to announce stimulus measures to keep the economy functioning. Much of this stimulus has been directed towards replacing lost wages from the highest levels of unemployment the economy has endured since the Great Depression of the 1930’s.Very different than prior recessionary periods, central banks were quick to introduce large scale policy to aid in offsetting reduced productivity caused by the pandemic.
This year, you may have noticed a considerable increase in activity in your portfolio compared to previous years – the economic indicators that we follow guided us to reduce exposure to equities in February; swift and powerful central bank policy then guided us to gradually increase exposure to equities through the past several months. The global workforce’s dependency on technology, as well as rapidly changing trends in consumer behavior (using more technology) has resulted in changes to the sector allocation within your portfolio. You may note more weighting in areas like e-commerce and internet security, for example. In the market volatility that led up to the U.S. election, we took advantage of market conditions to invest in Canadian technology companies that will help businesses transition into the new economy. In addition, with an increase in healthcare spending, we have also increased our exposure to the pharmaceutical industry in the US.
As we look to the future, we feel that the economy will take multiple years to recover and for unemployment to return to normal or historic levels. That said, the reengagement for the economy will eventually occur and markets tend to move in advance of economic data. We expect that we are in a period of positive, but slow economic growth. We feel that the current low interest rate environment, increase in infrastructure spending and massive government stimulus spending will continue in the years ahead. Over the next few weeks, we will look to increase exposure to areas of the market that will benefit from the reengagement of the economy as we move through 2021 and return to a more ‘normalized’ environment, such as small to mid-sized companies that have lagged their larger counterparts.