Author: Rachel Shulman

“The COVID-19 pandemic has demonstrated that no institution or individual alone can address the economic, environment, social and technological challenges of our complex, interdependent world.  The pandemic itself will not transform the world, but it has accelerated systemic changes that were apparent before its inception.  The fault lines that have emerged in 2020 now appear as critical crossroads in 2021.”

– Excerpt from World Economic Forum website on the Davos 2021 agenda

Last year presented challenges that no one anticipated.  While the battle against the COVID-19 virus is far from over, the rollout of vaccines has provided a light at the end of the tunnel.  This is a welcome relief for consumers, businesses and governments after one of the most difficult and uncertain periods in history.  Last year could not end quickly enough for most, and it will appropriately be remembered more for the devastation to lives and livelihoods stemming from the COVID-19 pandemic than the returns of the market or any individual stock.  As policymakers continue to work to arrest this terrible virus and to heal the global system, there are five critical forces that should drive the recovery and, importantly for investors, help to determine those industries and companies that will be the primary beneficiaries of the resulting capital flows.  The five forces involve pent-up demand, vaccine distribution, massive liquidity, low interest rates, and productivity improvements.  The combined effect of these forces will lead to both strong economic growth and healthy returns for investors in well-selected equities. 

To be sure, there are fundamental issues such as tackling a decaying infrastructure system, income inequality, civil unrest, fixing the education system, enhancing cyber security, and reducing the political divisiveness that need to be addressed immediately so that the country can then move onto important longer-term concerns such as deficits, debt levels, tax policy, entitlements, and demographic challenges.  Under these circumstances, market participants should emphasize actively managing their portfolios as a narrow range of securities should benefit disproportionately from the complex dynamics of the global economy. That said, the acceleration of the systemic changes described by the World Economic Forum will create a relatively small number of well-defined opportunities for market participants.  A January 4th article from McKinsey stated, “2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019.”  Given the many challenges facing the world, these times suggest investors should continue to be both cautious and opportunistic in 2021. However, better times are ahead for the economy, and market participants have already started to look past many of the near-term concerns and are focusing on opportunities developing for the post-COVID economy.

Pent-up Demand – Consumers, Corporations and Governments

“The great comeback of 2021 is surely coming, at least according to the new picture I have in my head, and it will be led and fed by the idea of pent-upness. There’s so much pent-up desire for joy out there. Surely it will begin to explode in late spring, with vaccines more available and a spreading sense that things are easing off and be fully anarchic by summer.  Growth will come back, people will burst out, it’s going to be exciting.”

– Peggy Noonan, The Wall Street Journal, December 31, 2020

After being locked down and unable to take part in what were our normal activities prior to the pandemic, most people are eager to return to living without restrictions.  As Peggy Noonan sums up quite well, there is so much pent-up demand not only from consumers, but also from governments and corporations that the effect may be similar to that of a coiled spring.  As shown in the chart, the lockdowns forced savings rates to extreme levels and consumers have spending power that will be unleashed once economies reopen likely in the second half of the year.  We have not seen this type of pent-up demand since the post-WWII period.   Back then it was ending the war that ignited the resumption of spending, this year it will be the distribution of vaccines that will get things started. 

The consumer is just one part of the pent-up demand; governments and corporations will also be increasing spending this year.  President Biden has proposed a $1.9 trillion stimulus plan, and this would be in addition to the $3 trillion fiscal stimulus in 2020.  For corporations, there is little choice but to increase capital spending in 2021 to acquire the most advanced technologies in order to effectively compete.  Investors should anticipate that much of corporate spending in the manufacturing sector will be directed to increasing capacity and upgrading plants and equipment with the newest technologies to lower costs and meet increasing demand. While many market prognosticators are forecasting a rapid increase in inflation, that is not the base case for ARS.  Our team believes that we might experience a modest rise in inflation this year but expect it to be transitory.  

Vaccine Distribution

“In the aftermath of the presidential election, the US has its last best chance to reset the fight against the coronavirus. Such a reset will require restoring the working relationship between the national government and the states. And the first true test of this strengthened relationship will be the distribution of vaccines.”

– Boston Consulting Group, November 30, 2020, “Only a Reset Can Defeat the Virus”

The COVID-19 pandemic has been a human and economic catastrophe, and the battle is far from over as new mutations are creating additional concerns.  But with the vaccine roll out underway, it’s possible to be cautiously optimistic that we will be shifting away from the lockdowns and restrictions so prevalent today to the next normal which should begin in earnest later this year.  The Biden Administration has taken a fresh approach to fight the virus and it started with designing a strategy that plays to the distinct strengths of the federal and state/local governments.  As the BCG highlights, “Federal and state governments have different strengths. By virtue of its borrowing and purchasing power, the federal government excels at funding and procurement. Its expertise and broad perspective also position the federal government to establish evidence-based national standards and offer tailored regulatory relief. The states’ strength derives from local knowledge and service delivery. They clearly see the reality in the field that can be fuzzy to federal officials.”  It is safe to say that the lack of proper coordination and communication between federal and state officials as well as with the drug manufacturers had prevented a more effective response to the distribution process. 

The ability of biotechnology and pharmaceutical companies to produce not one, but several effective vaccines in just a few months has put the United States and global economies on track for potentially a strong recovery in the second half of the year.  However, there are many manufacturing and logistical problems to be addressed which would suggest that not only does the United States need better coordination on all levels of government, but that corporations need to pitch in to assist in helping solve these complex challenges. This would not only provide a public service but also accelerate the time to get their businesses closer to the post-COVID environment.  The world continues to experience episodes of heightened uncertainty which are likely to persist at least until the virus is contained and people feel more confident that it is safe to return to many of the activities that are currently being prohibited, restricted, or avoided.  As we said in our August Outlook, “While we believe that innovation and science will win in the end, the road to recovery will be bumpy with unsettling news headlines adding to the already high level of uncertainty and unease.”  That has been the case the past few months and may continue to be until the current supply and logistical difficulties are resolved and herd immunity is achieved.  

Liquidity

One of the most fascinating aspects of 2020 was the speed and magnitude of the policy response from governments around the world, not just in lowering benchmark interest rates, but also by pumping an unprecedented amount of liquidity into the global system.  Nowhere was this more evident than in the U.S. as shown in the following chart.  As one can see, the United States’ combined monetary and fiscal policy responses last year was equivalent to over 48% of gross domestic product (GDP).  And that does not take into account this year’s initial stimulus proposal which would bring total stimulus in the U.S. to over 50% of gross domestic product.  Globally, governments and central banks have provided stimulus equal to more than 33% of global GDP and this figure continues to rise. 

Why is this important? The liquidity injected into the system has allowed the global economy to absorb the shock of the pandemic and rebound from the brink of a severe recession, if not, a depression. It also allowed employment, consumer net worth, and corporate profits to rebound strongly since the March lows. All this liquidity sloshing around the global system has forced investors to seek opportunities to get a higher return on their money and has encouraged added risk-taking.  This was clearly evidenced in the markets the last week in January as retail investors, using social media, turned the tables on a few hedge funds by executing a coordinated attack on the extreme short positions in GameStop shares which led to a “short-squeeze” that drove up the price of the company’s shares beyond reason.  The implications of this and the unusual trading activity of other stocks have yet to be determined, but it is safe to say that we have not heard the last of this yet as investors can expect regulatory and other changes in the not-too-distant future.

Interest Rates

“When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon,”

– Jay Powell, Federal Reserve Chair, in comments on January 14, 2021

For investors, the outlook for interest rates, inflation rates and corporate profits are the critical determinants of equity valuations.  Low interest rates are to the economy what blood is to the body as it promotes the flow of capital throughout the economy.  Interest rate levels either retard or augment capital flows, and today’s historically low rates maximize the ability of capital to be deployed.  Low interest rates allow for economies to heal and to grow by promoting consumption and capital expenditures by businesses.  High interest rates slow economic activity by restricting investment, borrowing and risk taking.  As Chair Powell and the rest of the Federal Reserve officials regularly remind us, they do not intend to raise rates any time soon.  As shown in the following chart, Fed officials do not forecast federal funds rate increases before 2023.  By anchoring rates near zero, the Federal Reserve is attempting to bring down other rates such as those for corporate debt as BAA yields have fallen to record low levels and mortgage rates have also come down to near-record low levels of 2.86% as of the time of this writing.  The Federal Reserve is maintaining its laser-like focus on returning the economy to full employment even if inflation runs above its target in the near term.  With the recent confirmation of Janet Yellen as Treasury Secretary, Chair Powell has a close ally to coordinate policy between the Federal Reserve and the Treasury Department.  Secretary Yellen’s knowledge of the challenges of U.S. economy and the Federal Reserve’s policy intentions are unique. For market participants, the Yellen-Powell combination should provide a supportive backdrop for equity valuations.

Productivity

“What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry. Digital capability is key to both resilience and growth.  It’s no longer enough to adopt technology to compete and grow.”

– Satyta Nardella, Chief Executive Officer, Microsoft Corporation

Productivity reflects the efficiency of an economy as well as serving as the determinant of the foreign exchange value of its currency.  Productivity growth has been lackluster in the United States over the past few decades.  The productivity improvements from technological advances have been most evident in the ability of the pharmaceutical industry to develop and bring to market multiple vaccines for COVID in record time.  In addition, U.S. manufacturers have made their production lines so much more efficient that they can run shifts with a fraction of the workers required 20 years ago.  This enables companies to bring back jobs and more effectively compete with foreign workers who are earning a fraction of the wages of U.S. workers.  Furthermore, the scale of the shift to remote work due to the pandemic would not have been possible without advances in cloud computing, artificial intelligence, software and 5G.  Productivity improvements are creating new large addressable markets in several areas such as green energy by lowering costs for electric vehicles, solar and wind power. 

The digitalization of the economy is enabling companies, large and small, to do more with less time and expense.  The growth of the digital economy is important for society as it aids nations in closing the gap between the actual and potential GDP of their economies by driving productivity growth, keeping inflation low and raising living standards.  While much has been written about the loss of jobs due to technology, many studies have shown the longer-term benefits offset the negatives. However, in the nearer term it does put a greater burden on governments and companies to help those workers impacted to learn new skills to compete in the new workplace.  Additionally, technological advances help create new industries, jobs and functions which can result in new and more efficient markets.  The productive capacity of a nation is closely connected with its education system as it needs to prepare workers for multiple careers they will likely experience.  Investors should anticipate that the expected increases in capital expenditures will lead to significant improvements in productivity while resulting in a strong growth, low inflation environment.  The rapid adoption of new technologies creates a positive feedback loop with future technologies being brought to market at an accelerated pace.  While certain types of jobs will disappear or see significant reductions in demand, the technological advances we see occurring at this time will create many new jobs which could well be better paying such as those being created in emerging industries like clean energy.

Investment Implications

As the economic recovery remains both fragile and fluid, we continue to be both opportunistic and cautious in our investment approach.  As we have written throughout this piece, the powerful shifts in the global economy are creating large investment opportunities, and well-selected equities should reward investors over the next several years.  There are investable ideas present in virtually all market environments, and investors should be able to achieve attractive absolute and relative returns over time by owning the businesses that are the beneficiaries of the secular trends. One issue that has been hard for many investors to grasp is the fact that a relatively small number of companies are prospering, while many others are struggling.  Why has this been occurring?  Because these successful companies have significant embedded advantages including scale, stronger balance sheets and better access to talent and capital. This enables them to commit more funds to increasing productivity by investing in innovation and technology advances.  Last year, Amazon, Apple, Alphabet and Microsoft together increased their capital expenditures at a nearly 25% rate.  This, in turn, led to higher earnings, better pay for employees, stronger market share, and ultimately greater shareholder value, while at the same time increasing their competitive positions.  Investors should focus on companies with “embedded advantages” over their peers.  It is for this reason that we feel the investment environment should favor active investment management over passive management and high conviction strategies over more diversified strategies.  Additionally, this low-interest-rate environment favors companies with strong balance sheets, resilient business models, and the ability to raise their dividends. These conditions have led to a broadening of the market to include small capitalization companies that are drivers of some of the most important new innovations.  We continue to identify a number of companies that are uniquely positioned to benefit and are strategically vital to enable the ongoing global transformation.

There are always risks to the economic outlook and that is certainly the case today.  Among the key risks that would shift our positive views from our current position would be a sharp rise in inflation and the exchange rate for the U.S. dollar. Other risks include how we manage the expanding federal deficits, asset valuations, tax and regulatory increases, extreme weather, geopolitical uncertainties and, of course, the resolution to the current health crisis.  The focus for client portfolios remains consistent with our recent Outlooks as we continue to favor the beneficiaries of the digital transformation involving cloud, cybersecurity, 5G and semiconductor chips as well as healthcare companies helping to lower healthcare costs in the U.S.  In the past quarter, we have increased our emphasis on the clean energy transition and climate change but continue to be vigilant to avoid over-hyped areas of the market.  Regardless, a number of leading companies, large and small, will continue to innovate, disrupt and evolve their business models to thrive in the coming years.  As such, investors should be focused on benefiting from the powerful secular trends and not on speculating in shares of companies whose futures are behind them as they have either lost their way or will be unable to transition in their current forms to benefit in the post-pandemic world.  

“It is a paradox that in our time of drastic rapid change, when the future is in our midst devouring the present before our eyes, we have never been less certain about what is ahead of us.”

– Eric Hoffer

The world is being tested by the COVID-19 crisis in ways it has not been previously challenged and this pandemic has become a defining event in our lifetimes.  This crisis has accelerated and augmented many of the negative and positive trends which have been in place for a considerable period of time prior to the pandemic and will continue to impact many aspects of our lives well into the future.  The measures taken to counter the virus have inflicted significant damage to families as far too many lives and livelihoods have been lost.  The world is experiencing a period of heightened uncertainty which is likely to persist at least until the virus is contained and people feel confident that it is safe to return to many of the activities that are currently being prohibited, restricted, or avoided.  Given the sharp contrasts between this recession and past ones,  investors should consider viewing the current landscape through a very different lens than used during previous crises.  We are in the midst of the most unusual economic period in United States history, and one in which the stock market has seemingly disconnected from the pandemic-driven economic reality. 

It has been an extraordinary time for all given how much the world has changed in a few months.  While we do not pretend to have all the answers, there are a few critical factors that we believe are being underappreciated and/or misunderstood by market participants which have had and are having significant impacts on investment strategy.   Among the most critical factors are the differences between this pandemic recession and a typical economic recession; the impact of global policy initiatives on the markets; and the acceleration of the technology revolution.  Crises always benefit some businesses while disadvantaging others, and this virus has created an environment where investors can continue to build and protect capital by investing in the problem-solvers.  

Why is this Pandemic Recession Different from a Typical Economic Recession?

“The uniqueness of this crisis – a crisis that results from a policy to tackle a health emergency and to save lives through containment measures.  This means that in contrast to the Great Financial Crisis (GFC), this crisis is truly exogenous, not the result of the unravelling of previous financial imbalance; truly uncertain, in the specific sense that the wide range of possibilities depends on unpredictable non-economic factors; and truly global – despite how the GFC is generally portrayed, many countries did not actually experience it.”

– Claudio Borio, Head of the Monetary and Economic Department at the of the Bank of International Settlements (BIS)

Coming into the year, the United States had record low unemployment rates, historically low interest rates, muted inflation and rising corporate profits.  It was a positive backdrop for a continuation of the longest economic expansion in U.S. history.  Before COVID-19 hit,  the U.S. and global economies were gradually improving as the massive stimulus initiatives, which had been previously implemented, were supporting gradual growth.  Then came the pandemic.  What is so different about this pandemic recession? It resulted from a lockdown of economic activity which caused a sudden and severe shock to both supply and demand.  This immediately led to lower spending, forced savings, a dramatic increase in unemployment and business bankruptcies and closures.  A typical economic recession results from central bank tightening of economic conditions to combat an overheating economy.  In the months leading up to the 2001 recession,  oil prices were rising rapidly, the federal reserve was tightening interest rates and the tech bubble was about to burst.  In contrast, this pandemic recession has seen oil prices collapse, historic monetary and fiscal policy responses, technological advances and the acceleration of the prospect of scientific breakthroughs.  This is the most all-encompassing policy response by the Federal Reserve, global central bankers and fiscal policymakers that has ever occurred both in the speed and magnitude of its implementation. These policy initiatives are being implemented at a time when the developed world is facing continuing deflationary pressures that have been ongoing for many years.  The effectiveness of the policy response has been demonstrated by the sharp reversal in economic activity as seen by the rebounds in housing, employment, vehicle production, inventory rebuilds and, importantly for investors, in the stock prices in many markets.  It is also evidenced by the decline in interest rates on many securities and on mortgage rates which have hit a record low. 

A major factor in answering “where do we go from here?” lies in the ability of the medical and scientific communities to deploy proper testing, effective treatment and to discover a vaccine.  As controversial as it sounds, it also requires better behavior on the part of everyone to help contain the spread by exercising recommended precautions such as distancing and wearing masks.  Only then can we begin the process to return to a better sense of normalcy, but even then, daily life is likely to be quite different.  Until then, investors should expect the second half of the year to be volatile as the world continues to struggle with reopening the global economy. While we believe that innovation and science will win in the end, the road to recovery will be bumpy with unsettling news headlines adding to the already high level of uncertainty and unease.  It is due to these factors, that most investors need to be grounded in their investment approach and not try to time or be swayed by short-term market swings. 

Is the Impact of the Policy Initiatives Both Misunderstood and Underestimated?

“We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”

– Jerome Powell, Federal Reserve Board Chair, June 29, 2020

The second factor is the impact of monetary and fiscal policy on the economy and the markets.  Back in 2008, we were among the minority of investors believing that Fed policy was deflationary not inflationary.  In our December 2008 Outlook, we wrote that “the Federal Reserve will have to maintain a historically low interest rate policy for the foreseeable future. To accomplish this goal the Federal Reserve must increase the supply of dollars, which will cheapen the currency and weaken the exchange rate.”  In March of 2009, then Federal Reserve Chair Ben Bernanke announced the introduction of quantitative easing (QE) or the printing of money.  Since then, interest rates have continued to move to near zero in the United States and below zero in many European countries.  This left many market participants to believe that the central banks have exhausted most, if not all, of the tools in the monetary policy toolbox.

On March 23^rd, the Fed announced QE4 and it is hard to appreciate how difficult the financial conditions were in the fixed income markets leading up to that decision. Two of the biggest sponsors of money market funds had to infuse $2.6 billion in liquidity to help meet redemptions.  This action by the Fed was underappreciated by market participants with respect to both the fragility in the system and the subsequent impact it has had on the capital markets. Consistent with its mandate of full employment and price stability, the Federal Reserve’s pandemic policies were designed to give market participants confidence that the capital markets were able to function properly and to provide liquidity to those companies that would not have needed it without the pandemic.  It also ensured that companies could continue to access the capital markets which in and of itself promotes growth.

We see something uniquely unusual that investors might be missing. In June, the Federal Reserve embarked on a program called the Secondary Market Corporate Credit Facility (Facility) to further support the capital markets as it began a program to lend, on a recourse basis, to a special purpose vehicle (SPV).  The SPV will purchase in the secondary market eligible individual corporate bonds; eligible corporate bond portfolios in the form of exchange traded funds (ETFs); and eligible corporate bond portfolios that track a broad market index.  In total, the Facility and the Primary Market Corporate Credit Facility (PMCCF) can purchase up to $750 billion of assets.  Critically, the Fed’s action to buy bonds not only supported the bond market, but it also supported the equity market.  Above is a partial list of companies whose debt the Federal Reserve is buying.  Equity owners are at the bottom of the capital structure placing them behind lenders exposing them to both credit and equity risk. The bond buying program has reduced the risk of equity ownership in so far as it has reduced the credit risk of company ownership, thereby making equity ownership potentially more valuable.  These policies have created a condition that has never existed before which requires a more tailored approach to equity valuation. The current debt cycle has been irreversibly changed, and this has enabled some companies to recapitalize using equity and others to refinance debt at lower rates, thereby buying additional time for the economy to recover.  The policy actions of the central banks have been further supported by immediate and massive fiscal responses.

Are the Markets Still Underestimating the Technology Revolution?

“As unfortunate as it has been, the virus has allowed the country to achieve the same amount of progress for digital adoption in two months as it would have in five years.”

– Mr. Vittorio Colao, head of the Italian government’s task force on reopening its economy

The third critical factor which is not fully appreciated is the acceleration of the digital transformation.  Just as the Industrial Revolution changed our way of life, we are experiencing a technology revolution that is changing how we live, learn, work and govern.  Think about how our lives have changed in just a few short months. Industry after industry is undergoing a rapid transformation.  Microsoft CEO Sayta Nadella said recently, “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security—we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything.”  This digital transformation is in the early stages and has only just begun in earnest.  It will impact every aspect of our lives.  No industry can afford not to fully engage in the technology revolution as supply and demand destruction and changes in the way we live will require companies to do more with less staff and lower costs to compete in the post-COVID world. 

Key to the technology revolution is the confluence of advances in 5G, computing power, artificial intelligence, machine learning, robotics, blockchain and 3D printing. These combined with the growth of the software development industry have enabled innovation to proceed at a rate much faster than previously experienced.  One only needs to look at the healthcare sector and the efforts by pharmaceutical companies to develop, test and, bring to market a vaccine for the COVID-19 virus as an example of the ability of technology to solve complex problems in a fraction of the time it previously would have taken.  While most investors understand that these advances are occurring, they have not adjusted their portfolio exposures to acknowledge the transformation.  There will be few industries, companies or households that will not be impacted. 

The Investment Implications of the Post-COVID World

It seems like investors have been navigating uncharted waters since the Great Financial Crisis in 2008.  As we entered this year, the strength of the U.S. economy and the continued recovery of the rest of the world had investors feeling generally comfortable.  Then came the COVID-19 virus, and now we are battling an invisible enemy and a highly uncertain future.  The

current environment requires a new playbook for investors especially after the more than 40% rebound in many stock markets since March. There are several issues that make this period a particularly challenging one.  First is the belief that the policymakers have exhausted all the tools at their disposal.  This is not a point of view shared by the ARS team. Second is that the lockdown has caused permanent damage to the economy as many jobs lost in recent months will not return and too many of the unemployed and underemployed may never be able to find jobs at similar or better wages.  Again, we do not share that view as history offers many examples of technology displacement being more than offset by the creation of new jobs.  According to a report from the Boston Consulting Group,  85% of the jobs that today’s learners will be doing in 2030 have not been invented yet.  The United States and other nations have a skills gap to address to take advantage of the opportunities in new jobs that will be created in the coming months and years.  We have written in detail about our concerns about the skills gap and the need to transform our educational system to reflect the changes required.  Debt and deficits are also a concern for investors and properly so, but those are issues to address in the post-COVID period.  At the present time, policymakers should continue to focus on supporting the economy until they are confident that we are on a path to more sustainable growth.

ARS remains focused on identifying those businesses that are the problem solvers for the COVID and post-COVID world while avoiding those that are negatively impacted by this disease. To protect and build capital in this difficult climate, investors should continue to focus on the secular beneficiaries, particularly those on the cutting edge of the digital transformation across industries. Many of these companies have rebounded so strongly that their valuations have become overextended or have discounted strong earnings prospects well into the future.  We continue to own some of these in our portfolios. In those cases where the current valuation reflects growth rates beyond reasonable math, ARS is either reducing the position in case it just moved too far too fast, or liquidating the position if the price is too speculative based on reasonable standards of valuation.  We are investors, not speculators. We also continue to hold higher than normal cash levels to take advantage of the volatility in the markets.  Our primary areas of focus remain on those companies driving the digital transformation, industry leaders and innovators providing healthcare solutions and on defense companies as the geopolitical climate remains challenged, particularly considering the current state of U.S. and China relations.  During the quarter, ARS initiated a position in a gold mining company in response to growing concerns about currencies, debt and deficits.  Interesting and perhaps surprising to many since the year 2000, gold has provided similar returns to investors as U.S. equities have delivered.  

The standard of equity valuation for ARS begins with the outlook for corporate profits, interest rates and inflation rates.  While corporate profits will be lower in 2020 than 2019 and might not return to previous highs until sometime in 2022, there is wide dispersion in the outlook for earnings across sectors, industries and individual companies.  Therefore, this is an ideal environment for active strategies to outperform passive strategies.  Interest rates will likely remain low for an extended period of time as the debt levels around the world will not be able to be serviced at higher interest rate levels without weakening economic activity and thereby putting further downward pressure on deflationary forces.  While the economy has been more deflation-prone than inflation-prone for many years, it would not surprise us to see inflation pick up slightly in the coming quarters as supply chain disruptions may cause some transitory pressures.

We continue to believe that it is a time to be both cautious and opportunistic.  We would remind  investors that the sudden decline and rebound in the equity markets reflected the forces described in this Outlook.  We continue to favor individual stocks, cash and gold over bonds, and believe that policymakers must continue to provide the necessary support to manage through this COVID-19 period.  As we said at the start of the Outlook, crises always benefit some businesses while disadvantaging others, and that is certainly the case at present.  The fact is that there are far more people employed than unemployed in the United States today.  Clearly, certain industries and their workers, particularly those in the leisure, travel and hospitality, are being severely impacted but these represent a smaller part of the total employment base than those that stand to benefit from the digital transformation that is presently occurring and that lies ahead. 

This economic description does not in any way minimize the awful tragedy affecting so many individuals and their families.  It is easy and completely understandable to emphasize the challenges present in the global system, but from an investment perspective, one must balance those concerns with today’s opportunities as well as the new opportunities that are in the process of developing.  We remain vigilant in identifying those companies that are the beneficiaries while working to avoid those companies that are being negatively impacted.  In today’s rapidly changing environment, one must stand ready to seize the opportunities presented, be quick to course- correct as necessary, while remaining grounded in a proven investment process to protect and build capital in this unusual period in history.