We always know less than we would like to know. Right now, there are three things in particular that will have a significant impact on the investing world, and I would classify each of them as pretty much unknowable, at least right now. I have a suspicion, however, that we will know the answer to one of the questions within a couple of weeks, another one by about November 4th, and the third, with luck, by the end of the year. Here are my three big questions.
US Fiscal Stimulus Package
As bad as the COVID induced recession has been in the US, with unemployment currently standing at around 10.2%, it would have been much, much worse without the massive stimulus packages enacted by Congress in March and April. The number of jobs lost permanently, the number of mortgages falling irrecoverably into default, and the number of small businesses disappearing forever would have been catastrophic in the absence of the $2 trillion injected directly into the hands of citizens. However, the aid package expired in August, and so far, the Republicans and Democrats cannot agree on an extension or a substitute. With COVID still uncontrolled in the US, the impasse has the potential to do a lot of damage to the economy in both the short and long run. All the politicians know this of course, and nobody wants to be blamed for an even deeper recession. The odds are the logjam will be broken in the next couple of weeks, but if it is not, the consequences for markets could be severe.
The US election
All elections are contentious, by definition, but this one ranks high on the list for rancor, angst and unpleasantness. While many think that the markets and Wall Street would prefer four more years of Trump, recent surveys indicate that a majority of financial firms would enjoy the stability, predictability and (presumably) honesty of a Biden-led government. A Democratic presidential win would, however, be less impactful if the Senate stays Republican. While we don’t know the outcome, we do know pretty much when we will find out, (although even that is somewhat uncertain this time around).
When Trump won in 2016, Dow futures fell 1,000 points between election night and the opening of the market the next day, but the market actually ended the month up 5.4%. Gallons of ink will be used and a bunch of tweets and blogs will be published, all attempting to predict what will happen in the various scenarios. The truth is, nobody, including us, has any idea. In the medium to long run, company fundamentals tend to prevail and are usually much more important than changes in economic and tax policy.
The COVID vaccine
Will there be one (or more)? When? Will people be vaccinated in sufficient number to tame the virus? Most experts agree that the only way we will truly get back to normal is by developing immunity in a large percentage of the population. There appears to be a wide consensus that at least one effective vaccine is likely to come on to the market by the end of 2020, and that by 2021 a vaccine should be quite widely available. But as with our other two imponderables, nobody knows for sure. The impact of a successful vaccine would be very significant on the North American and world economies. Failure to find a safe and effective vaccine would likely lead to a prolongation of the current depressed economy, but with the added fact that the current level of fiscal stimulus cannot be afforded forever.
Of the three big unknowns, this is probably the most important, and unfortunately, it comes with a very uncertain timeline that could easily extend well into next year.
So what should a prudent investor do? The fact is that we are always investing in conditions of uncertainty to one extent or another. This time is perhaps more extreme, but only in degree, not in kind. Experience shows that sticking to a rigorous process, doing good fundamental analysis and managing portfolios with discipline and caution leads to good results in all kinds of markets. We have now seen results for the last quarter (June 30) for all of our portfolio companies including the Canadian banks (July 31st quarter-ends). With perhaps three or four exceptions out of fifty portfolio companies, we were happy with the results. Many of the firms in which we have invested for our clients did much better than expected, including the banks, and we have seen no dividend cuts in the past three months.
As we get answers to the three big questions, we will adjust our course in response and as necessary. As always, your portfolio manager would be happy to talk to you about your account.
David Baskin, President