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This quarter, I focus on three topics:
- The path of the pandemic and related investment ideas
- Inflation, including three-year and 10-year expectations and portfolio implications
- Questions about active management in areas like defensive strategies, value, technology, and alternatives
As we approach the end of a very challenging year, investors continue to feel their way through an economic and market environment in which history offers limited guidance. In this note, I update my thinking about the pandemic and how investors should respond. Then I dive into two big questions that have come up in the wake of COVID-19: Are we heading for future inflation and do we need to rethink active management? On inflation, I describe what has changed since the pandemic began, offer my assessment of the likely outcomes, and provide a road map for thinking about a portfolio response. On active management, I address the performance of defensive equity strategies and value stocks, the dominance of technology, and the backdrop for private assets and hedge funds.
Investing during the pandemic: An update
Last quarter, I sketched out three scenarios for the disease and the economy. Path A (“Back to before”; 30% probability) assumes a return to pre-COVID activity in the space of a quarter or two, whether that’s the result of a successful vaccine or simply a gradual return to ordinary life without a spike in case counts. In Path B (“Protracted pain”; 65% probability), the current environment lasts for a more extended period with limited resumption in activity and continued challenges for the economy and the markets. And in Path C (“Tip of the iceberg”; 5% probability), everything that’s happened since early 2020 is still just a prelude to a major economic crisis.
I would argue that we are currently closer to Path B. There have been some indications that a vaccine may be coming, but also reasons to think it may take longer than hoped. Meanwhile, the market seems to be…
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