As 2020 comes to an end, the extreme uncertainty that defined the outlook over the past year is subsiding. There are many questions about the speed with which the Covid-19 vaccines can be made available across the world, but the high estimated efficacy rates imply that “herd immunity” can be achieved with a lower level of vaccination than had been assumed. 

After almost a year of public debate, the Fed announced a subtle but important change to its monetary policy framework. Rather than targeting an inflation rate of 2%, the Fed will look to achieve an average inflation rate of 2% over time.

As we enter the final few weeks preceding the US election, President Trump is more committed than ever to deliver a vaccine for Covid-19, or at least convince the public that one is very near. It's no secret that the electorate overwhelmingly disapproves his management of the pandemic, so this focus is part of a campaign effort to improve his standing prior to the election.

Equity market developments since the beginning of April have been confounding.  On the one hand, most of the worst predictions for the global economy have been confirmed, and most countries are in the midst of the worst economic contraction in a century.  On the other hand, markets have recovered back to recent highs that were achieved at a time when the outlook was relatively robust, few had heard of Covid-19, and valuations were arguably somewhat high. What accounts for this dissonance?

There are no historical precedents for the type of economic dislocations that we are experiencing. War time economies experience disruptions in some sectors, but they also benefit from the considerable mobilisation of economic resources towards the war effort. Today’s shutdowns are of a different nature: they are a deliberate attempt to arrest the spread of the Covid-19 by minimising all economic activity that involves social interaction.

A safe way to preserve capital is not to sell into a stressed market. If despite careful planning and sound risk management selling is unavoidable, be aware of pitfalls and stumbling blocks that lead to increased realized losses.  

It’s not reasonable to expect finance professionals to turn into epidemiologists within a short period of time. Yet, this is precisely the challenge faced by every analyst in recent weeks. I will not feign competence.

The past year has been as rewarding for investors as it has been confounding for analysts.  While economic growth weakened to its slowest pace since the global financial crisis, both equity and fixed income markets performed well. Market valuations sent contradictory signals regarding the outlook. An observer who has not followed markets closely might wonder if equities and bond markets are dominated by separate sets of investors that rarely commingle.

Buy a cheap asset, watch it appreciate, and then sell it. What sounds like a simple and intriguing recipe for investment success is probably one of the most complicated to implement.