What’s changed for now and what’s changed forever

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My wife and I have this sort of low-boil, ongoing debate about what’s changed temporarily and what’s changed permanently for the rest of our lives as a result of the pandemic. She tends to think more in terms of things going “back to normal” than I do. I don’t think there is a normal for the world right now and whatever our normal turns out to be won’t be apparent to us for years.

It will take time for the realization to set in that 2020 truly marked the end of a way of life we’ve known our whole lives. This doesn’t mean the new way of life will be worse. It may even be better (clean and hygienic!). Either way, it will not be the same.

On the economic and investment side, the quants at BofA are thinking that way too. According to a new piece, over 60% of the bank’s analysts see rising prices in their respective coverage universe. One of BofA’s top strategists, Michael Hartnett, is talking about 2020 being the secular bottom for rates and inflation.

And now here’s Savita Subramanian and Jill Hall about what’s changed in the big picture:

“Our US Regime Indicator has shifted to Mid-Cycle, a phase where inflation is typically strongest. In this phase, small caps and Value have typically outperformed large caps and Growth – further supported by the profits recovery and economic rebound we expect this year. Small caps and Value stocks were also some of the best-performing assets during the inflationary period of the late 60s, and small caps historically have benefitted more from US capex cycles – which our work suggests are highly correlated with commodity inflation. Meanwhile, after years of low inflation and oligopolistic trends within the equity market in which larger companies have continued to take share (contributing to peak income and wealth inequality and suppressing wages in recent decades), this could finally be reversing given pro-small-business sentiment and a focus on social/income equality by the Biden administration, along with potential regulation and anti-monopolistic sentiment in areas like Big Tech.”

A year ago, it felt inevitable that the large technology oligopolists would continue to see their market caps grow and their market dominance increase. This outcome doesn’t feel quite so inevitable now, and investors are certainly not voting that way with their dollars anymore. It took a pandemic and that pandemic’s aftermath to change this narrative. And a whole lot of fiscal stimulus and monetary stimulus, too. But here we are, at the big, fat middle part of an economic expansion with rising prices, capex growth, increasing demand for skilled labor and a massive, generational infrastructure bill on the way.

Get used to rising prices for goods and services as well as the cost of capital not being free anymore. Now it’s a horserace.


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