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Sydnee Gatewood
Sydnee Gatewood
Articles (2814) 

First Eagle Commentary- Election 2020: Seeking Resilience in Uncertain Times

'With the virtual conventions finished and the Trump and Biden campaigns well underway, the world awaits the outcome of November's US elections'

September 30, 2020 | About:

Key Takeaways

  • While many pundits have confidently expounded on industries they think will flourish/suffer under a new Biden or second Trump presidency, we believe the future of economies and investment markets cannot be predicted reliably.
  • We do know that whoever takes office in Washington in 2021 will face very serious challenges. These include the ongoing threat to public health and economic output from Covid-19 and the unprecedented levels of monetary and fiscal stimulus employed to combat it; massive levels of government and corporate debt; and heightened geopo-litical risks, especially tensions between the United States and China.
  • Equity markets have rallied through much of the spring and summer of 2020 in spite of these risks, with a rela-tively small subset of stocks driving the S&P 500 Index and other indexes to record levels that could prove unten-able given the underlying fundamentals.
  • While cognizant of these risks, at First Eagle we do not let them—or the election itself—divert us from our bottom-up process of seeking stocks one at time. We look for well-positioned, well-capitalized, well-managed compa-nies, and we buy their equity only when it is selling at a discount to our estimate of intrinsic value.

With the virtual conventions finished and the Trump and Biden campaigns well underway, the world awaits the outcome of November's US elections—not just for president, but also for 35 Senate seats and the entire House of Representatives. Well before the votes are tallied, some pundits are already advising investors about the sectors and industries that will benefit or suffer based on potential election scenarios. In our view, this is not a meaningful exercise.

A Danish proverb states, "It is difficult to make predictions, especially about the future." We agree. Our investment philos-ophy at First Eagle starts with the conviction that the future is fundamentally unknowable and that the direction of a complex system like an economy or a market cannot be predicted with any reliability. In other words, even on the night of November 3—or whenever this year's election returns are definitive—we will not be certain how the federal government will affect the economy or investment markets in either the near or long term.

This is not to say that the election is unimportant to the economy or the markets. As we discuss, the next president and Congress will face challenges with profound implications for the economic health of nations as well as the physical health of their populations. It is because of challenges like these that First Eagle strives to construct resilient investment portfolios. Rather than taking positions based on forecasts that are by nature uncer-tain, we strive to own companies whose fundamental qualities suggest the potential to generate persistent earnings over time— and to acquire these businesses only at prices that meet our strict valuation criteria.

Domestic and Global Risks Proliferate

While we do not attempt to forecast the outcome of the elections in the fall—whether for president or for control of the Senate and House—we are comfortable suggesting that those sworn into office in January 2021 will have their work cut out for them. Though the policy approaches of the two major parties may differ significantly in some cases, there are a number of immediate and pressing challenges that will face our elected officials, independent of whether an R or D follows their name.

Covid-19 and its economic impact. The pandemic may seem relatively under "control" in certain parts of the United States, Europe and Asia, but the overall picture remains grim, with global rates of infection and mortality continuing to climb. Around the world there have been close to 25 million cases and over 850,000 fatalities.1 Many American states that attempted to restart their economies prematurely have had

to reverse course and are now requiring masks, restricting indoor activities and rethinking their decisions to reopen schools.

The economic impact of the pandemic has been massive: US GDP declined at an annualized rate of 32.9% in the second quarter of 2020—the largest quarterly drop on record.2 Although the US unemployment rate has fallen from its all-time peak of 14.7% in April,3 it remains very high in historical terms. Meanwhile, from a global perspective, pandemic-related shocks to supply and demand are expected to result in a recession of historic proportions. The World Bank is forecasting that more than 90% of the world's economies will be in recession in 2020, making this the most broad-based contraction of the past 150 years. It also expects the current recession to be the fourth deepest in per-capita terms over this same period, making it the worst since World War II.

There has been much talk about the likelihood that this recession will end in a V-shaped recovery, which is generally accepted to designate a pattern in which real GDP growth returns to its pre-recession trend line. While the rebound in investment markets suggests that many investors are confident in such a recovery, we believe it's unlikely the global economy will escape a crisis of this depth and breadth without some scars. First Eagle is not alone in this view: Exhibit 2, which represents the World Bank's outlook, projects GDP growth in both developed and emerging markets to be well below their pre- Covid trend lines, and bodies such as the International Monetary Fund, Organization for Economic Co-operation and Development, Federal Open Market Committee and European Central Bank hold similarly restrained expectations for the recovery.

Massive monetary and fiscal policy response. The US government in 2021 will inherit unprecedented fiscal and monetary stimulus programs—ranging from interest rate cuts and asset purchases to broad-based fiscal packages—that may be required for years to come but that eventually will have to be unwound with both steadiness and delicacy.

We are struck by the fact that each time the "Fed put" has been employed, it has become larger. In response to Covid-19, for example, the Fed has rolled out all the facilities it implemented to fight the global financial crisis (including very large-scale purchases of Treasuries and mortgage-backed securities) as well as new programs to support the corporate and municipal bond markets, small and medium-sized enter-prises and nonprofit organizations. While some of these facilities have not yet been launched and the utilization of others remains very low, their impact has already been significant, especially in the bond markets, where the Fed backstop attracted investors and contributed to pronounced spread tightening following the market dislocations immediately after the Covid-19 outbreak. Meanwhile, debt on the Fed's balance sheet has increased from about $4.2 trillion at the start of 2020 to nearly $7 trillion by the end of August, as shown in Exhibit 3.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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