As we fast approach the end of 2021, I’ve been taking time to reflect on some of the lessons I’ve learned over the past year. In 20 months or so, the world has undergone a slew of rapid-fire changes, and it has resulted in significant – and I would argue, lasting – shifts in the way we work, how we live, and how we interact. I think this period in history will be remembered for how it catalyzed many of these changes.
With that in mind, I’d like to use this week’s column to memorialize four big takeaways I’ve had since the beginning of 2020.
Lesson #1: The Challenges of Global Synchronized Reopening
When the global economy shut down for weeks in the spring of 2020, the effects were largely obvious to most market-watchers – a sharp recession was inevitable. What many economists did not fully anticipate, however, was how challenging a globally synchronized reopening would be.
To this day, a semiconductor shortage continues to stall auto production, with orders backing up six months in some cases. I’ve written many times about supply chain entanglements, which have sources in many places – from factories in Malaysia to ports in Los Angeles. To boot, many service sector businesses are having difficulty finding workers, which only adds to delays and price pressures.
Perhaps the most visible and tangible effects of the globally synchronized reopening have been in commodity prices, which many readers know has hit everything from nickel to copper, to lumber and aluminum. All told, the producer price index for all commodities has soared past pre-pandemic levels – a trend that is squeezing profit margins for producers and resulting in higher costs for consumers.
Source: Federal Reserve Bank of St. Louis1
I continue to believe the current imbalances in the global economy – where demand firmly outweighs supply – is a temporary issue that will resolve itself in time. But truth be told, it’s taking longer than I expected.
Lesson #2: Hybrid Work is Here to Stay
I would argue that the ‘old normal’ of commuting to the office five days a week was slowly, but surely, changing even before the pandemic hit. Many large companies offered ‘work from home’ days and exceptions could be made for employees who needed to work remotely for special situations. A hybrid work model was developing – but the pandemic catalyzed it into being the new normal.
Studies are starting to emerge that may help corporations navigate the issue. A recent study of 30,000 U.S. workers found that working from home around one day a week would boost productivity by 4.8%, with a significant part of the one-off increase coming from reduced commuting time. The relief of not having to go to the office may also provide a boost of happiness and energy to more vigorously and creatively work on the day’s tasks.
Another study from the University of Chicago’s Michael Gibbs, however, found that workers at home were more susceptible to domestic distractions like childcare and errands, and the report also noted that people working from home may exaggerate productivity in an effort to maintain the privilege.2
The hybrid model appears to be the happy medium, and corporations will likely spend the next few years gathering data on how to best structure the new approach. For a company like Google, for example, the early idea is to have employees in the office three days a week, with the ability to spend two days “wherever employees work best.”
Lesson #3: Remember How Fast the Market and Economy Can Move
A few months ago, the Bureau of Economic Analysis officially confirmed that the 2020 pandemic-induced recession ended in April 2020. Since the recession started in February of that year, it meant the economic downturn lasted all of two months. As it were, when the recession was officially declared in June 2020, it was already over!
The stock market also moved with extraordinary quickness. Before most people even had time to wrap their heads around what the pandemic even was, and what it would mean for the future, the stock market had already posted a bear market and a v-shaped recovery. In six months, the market priced in the recession and the economic recovery that followed.
Source: Federal Reserve Bank of St. Louis3
I have written before that event-driven recessions and bear markets tend to be sharper on the downside and shorter in duration than cyclical or structural recessions. But the Covid-19 recession and bear happened with unparalleled speed, and I think it’s fair to say that any investor who tried to time it likely got it wrong. To me, this is a good reminder that the economy and markets often work faster than many expect, and trying to time investment decisions over such short horizons can be a flawed approach.
Bottom Line for Investors
The global pandemic is far from over, and the U.S. economy is far from running smoothly again. But I think the three lessons detailed above will be lasting takeaways from this period of economic history – they are observations we can remember and learn from, and perhaps apply in the future to understand change while avoiding mistakes.