Four Paradigm Shifts Affecting the Global Markets and Investors

Almost every day someone is telling me that they are expecting a giant crash. On other days I am asked which pharmaceutical company is going to come up with the vaccine for Covid19. However, the question I’m asking is what changes will we see because of the paradigm shifts that are affecting the global markets, our investors today, and the rest of the year?

One special element is driving our markets — the overwhelming amount of fiscal action the Federal Reserve has contributed to the economy. It has been an overwhelming driver in the financial markets by contributing over $17 trillion in balance sheet expansion since the crisis hit the US in March. This expansion is what is supporting our financial markets, and it’s not over. There is most likely going to be another fiscal recovery package passed shortly. One thing I’ve realized in my 38 years of experience is that you don’t fight the Federal Reserve.

Low interest rates are here to stay and are the first paradigm shift. Low interest rates and the search for higher income is going to cause investors to search income returns elsewhere. Therefore, we are going to see more flows into the equity markets and also a long-term debate away from the classic 60/40 equity (the fixed income formula) to a new paradigm of 80/20.
The reason being is the 40% fixed income is being driven by a benchmark that’s less than 1%. That’s a new historic low. The average for 44 years was 6.4%.

Joyce Chang chairman of global research at JP Morgan suggests, “We’re not predicting outstanding returns from activities but you will have some returns. The traditional 60/40 split, which has earned around 10% a year for the past 40 to 50 years is predicted to be down to 3 1/2%. Even if you tilted more toward equities, you’re going to get something a little less than 5%. But, investors really have to contemplate what their overall asset allocation parameters will be. In a world of zero yields, is 80/20 the way to go?” Chang further suggests, “because of the need for more sophisticated strategies utilizing a more aggressive approach, the investor should seek qualified professional money management for investment assistance.”

The second shift is the rising unconventional monetary policies by the Federal Reserve. These policies may not be reversing anytime soon. The Fed’s focus used to be controlling inflation. But now has gravitated to ensuring easy financial conditions and promoting financial liquidity.

The third shift is China. The Chinese population and their economy is the largest in the world. When China’s economy suffers, most countries fear their economy will crash next. In fact, after Covid-19’s havoc, China’s rapid economic recovery was very surprising. Many countries feared their economies would go through a major crisis because of China, but their fears have diminished. The US and China will selectively cooperate based on their own self-interest and market participants should take a clear view of these issues.

The final shift is the de-globalization. Meaning, how do we all adjust if the Covid-19 rears its evil head again in the near future? Do we focus just on the people in our country? Or, do we as citizens of this planet work together to solve the problem that threatens our health and lives. Unfortunately, some people are more concerned about where the solution comes from rather that a solution has been brought forward.

Challenging times lay ahead. The recovery of economies and industries from the negative effects of Covid-19 needs to begin. People need to get well and feel confident about their future. They need to be able to feel safe going back to work. Building a suitable portfolio leading into retirement is extremely challenging today with historic low interest rates, mixed corporate earnings, an extremely liquidity friendly Fed, and record-breaking unemployment. This all equates to a very nervous market and shifting prices.

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Warmest Regards,

Your friends at Woloshin Investment Management