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What a Difference a Year Makes - 1st Quarter – 2021

The last year seems to have packed more into it than any other twelve-month period we can remember. We entered the decade optimistic about the future, but by February, the collective mood quickly changed as an unprecedented global pandemic unfolded. In less than two months, emotions progressed through denial, fear, and panic, before bottoming in despair. Over the ensuing three quarters, hope and relief took hold and led us back to a different sort of optimism.

Change over the last year has accelerated. Many aspects of life—politics, the economy and social norms, just to name a few—have undergone significant transformations. We opened our April 2020 note with “We will get through this pandemic just as previous generations persevered through their hardships.” Looking back, we are encouraged by how quickly many aspects of life are returning to normal. No factor has been as crucial to this success as the private and public sectors’ record pace in developing, testing, and distributing multiple safe and highly effective vaccines.

Though the pandemic and the responses to it have impacted communities around the world to varying degrees, global economies are on the mend. Our optimism regarding financial markets is rooted in the continued and coordinated support of governments and central banks. Relative to past problems of this magnitude, this response has been swift and remarkably effective where implemented.

The pandemic has altered politics and policy surrounding globalization. Sourcing goods and services from low-cost suppliers to increase profitability has hit a speed bump, and so the global supply chain is evolving. Since the beginning of the year, we have observed a concerted effort by industry to diversify sourcing and return more manufacturing to domestic markets. This benefits local employment but may lead to an increase in costs and higher inflation. The real advantages may accrue to economies in the East as they are growing much faster than those in the West.

Technology will continue to transform legacy businesses that stay on top of innovation, and attack those that do not. In 2020, this transformation drove relative valuations for ‘growth’ compared to ‘value’ stocks. Although we may observe a reversion in the short-term, we believe the real risk still lies with old line businesses whose relevancy and profitability may not survive technological disruption. Examples abound in commercial real estate, manufacturing, and services, to name a few. Risk offers both threat and opportunity.

The last theme we will touch on relates to a subset of technological innovation: blockchain and non-fungible token (NFTs). What was initially considered a passing fad continues to gain acceptance and functionality. While bitcoin and the other crypto currencies are still in their infancies, the Wild West that has characterized these markets is slowly and methodically being tamed. A blockchain itself has no intrinsic value; it is the rapid adoption of the underlying technology and functionality that provides value to its users. Institutions and industry alike have begun to invest heavily to develop infrastructure which will lead NFTs to be viewed as a legitimate store of value. It is only a matter of time before government regulation catches up, validating this approach.

Looking Ahead  

With spring upon us, we wish you and your families good health, prosperity, and joy. We look forward to updating you in July regarding with second quarter results. Please contact us in the meantime to continue the conversation.

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 EPIQ Partners

Daniel Aronson, CFA          Bruce Langer, CFA         Ben Frey, CTP        Rachael Scherer, CFA        Julie Ellison       

Ben Frey