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Surge Capacity, Elections and Letter-shaped Recoveries Thumbnail

Surge Capacity, Elections and Letter-shaped Recoveries

Where does your “surge capacity” reserve stand?

Surge capacity is a term I was not all that familiar with until I heard it several times this past month. Essentially, surge capacity refers to the human tendency of being able to draw on a reserve of mental and physical energy in times of adversity and crisis. Defined more articulately in an article my colleague recently posted to the Wolf Group Capital Advisors LinkedIn page, surge capacity “is a collection of adaptive systems—mental and physical—that humans draw on for short-term survival in acutely stressful situations, such as natural disasters.”

 Well, if you have been feeling lethargic, frustrated or downright depressed lately, it could be because you have used up the bulk of your surge capacity and you are now, as is often said, “running on fumes.” Our brains struggle to process this much stress for such a prolonged period of time. As the above referenced article points out, to help cope with this type of uncertainty and prolonged stress we must learn to accept the situation and expect a bit less of ourselves.

For instance, accepting that life is different now (and may continue to be different for another prolonged period of time) will help in focusing your energies elsewhere, where they can be put to a better, more constructive use. 

While you are spending your time doing better, more constructive things, you should also cut yourself a bit of a break. In other words, don’t expect your current self to be the same person you were a year ago. If life is completely different, you have to allow yourself to be a bit different too. Operating without the same support system, activities and routines means that you are likely not going to have as much bandwidth as you did before. This is not to say that you should give up on your goals or routinely accept mediocrity. It is, however, okay if you are not achieving and accomplishing as much as you were in the past. You should not hold yourself to all of the same standards as you do not have the same amount of time and resources at your disposal.

Managing Backwards?

Some business leaders are doing what they can to not accept the current reality and are trying to recapture January of 2020. The world has changed and those business leaders that accept that fact and manage to the new, more technologically savvy marketplace will be much better suited for success in 2020 and beyond. 

For instance, many investors are pointing out the difference in returns in various sectors of the market. That is, technology, healthcare and communication services have been doing quite well this year while energy, industrials and financials have been performing poorly. We caution investors against making blanket sector calls and instead would point to the fact that certain companies within each sector stand to benefit.

As Jason Thomas, Head of Global Research at Carlyle recently wrote in his insightful paper entitled When the Future Arrives Early, “technology facilitates business transformation, but change ultimately depends on the initiative of management teams and the investors who back them. That’s where recessions come in: while expansions can breed complacency, macroeconomic shocks often spur rethinking that accelerates the evolution of business models.” 

Because not all companies will be successful adopting efficient technology, we expect the dispersion of performance that we’ve seen across sectors to also happen within sectors. The companies within each sector that are willing to take an in-depth look at their business models and ascertain how and where they can best employ technology to improve the customer experience will be the winners.

The Presidential Election and its effect on financial markets and the economy

With respect to the upcoming election, to say there has been a lot to sort through and there will continue to be a lot of information to digest over the coming weeks is an understatement. It does not take a political science expert to point out that as Congress has become increasingly polarized, it has become less and less functional. This apparent dysfunction seems to have granted the executive office a good deal of power. 

As Goldman Sachs alludes to in their August 2020 “US Political Perspectives” presentation, on some level, regardless of who wins the election, it appears as though policy implementation may be most likely to happen through executive order. In that same presentation, Goldman goes on to say, “the broad investibility of election outcomes may be limited as a multiplicity of factors drives the markets.” Therefore, expressing your political views with any sort of massive portfolio shift is likely not the most advisable course of action! Based on the various factors at play and the many unknowns, it is best to express one’s political views with a vote, not a trade.

Lastly, remember that we tend to overrate politicians in terms of their importance to our financial well-being. Things like Federal Reserve policy and where we are in the economic cycle also greatly contribute to how markets behave and react during a specific President’s tenure.

Which letter of the alphabet will we be talking about 5 years from now?

V, U, W, L, K or some other letter we have not even thought of yet…

There has been no shortage of opinion on the shape of the economic recovery that we will see coming out of the pandemic. At first, the traditional V and U-shaped recoveries were discussed quite a bit. Then we started hearing talk of an L-shaped recovery (by the way, where is the recovery in an L-shaped recovery?). After L came quite a bit of talk about a W-shaped recovery which began to gain popularity and then out of nowhere came talk of the K-shaped recovery. And while this alphabet soup of guesses as to the shape of the recovery sounds somewhat comical, on a wider scale, it is actually a bit of a problem.

The issue being that the two or three most recent economic recoveries also took the shape of a K. For those not familiar with the K-shaped recovery, that is the type of recovery where the affluent and those who own financial assets (represented by the top right part of the K) recover quite nicely, perhaps doing even better than before the recession. Those in the lower income brackets and those who do not own financial assets (represented by the bottom right part of the K) do more poorly, in the end likely ending up in a worse position than before the recession began.

The K-shaped recovery could also represent industries. For example, technology, healthcare and communication services being represented by the top right part of the K and travel, leisure and hospitality being represented by the bottom right part of the K. 

If this does happen to be the result, there may be a large swath of people left behind. This could further exacerbate the discrepancy between those in the top 1% of the income distribution and those in the bottom quartile. The pandemic may have further accelerated the wealth gap between those who own capital and financial assets and those in the lower income brackets, especially those workers that have a much more difficult time working remotely.

Despite some negativity mentioned above, I will attempt to end this month’s commentary on a positive note. Everyone is in agreement that there are areas of the economy that need more work. Any stimulus package that gets approved in the near future will likely address those who need it most. Additionally, most economic strategists would agree that we happened to go into the pandemic without having major structural imbalances or the heavy debt burdens that we had in past recessions. And while there are still worries of an uneven recovery, the fact that economic fundamentals were quite strong before the recovery should be viewed as a positive sign. As Yung-Yu Ma, Chief Investment Strategist at BMO Wealth Management said, “I think it’s more a matter where there will be some industries that take an extra six to nine months to really pick up economic momentum. But once that happens, everything will go together in the same general trajectory.”

By Charles Verruggio, Chief Investment Officer & Senior Financial Advisor