Market Insights: “A Tale of Two Cities”

December 17, 2020

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” ~ Charles Dickens

This famous first sentence from A Tale of Two Cities written 160 years ago reads as if it was written last week to describe all that is 2020. There are stark contrasts in the economy, the financial markets, politics, and healthcare, which are critical for us to examine as we make decisions about our overall investment strategy and allocation changes.


Biden vs. Trump
Blue State vs. Red State
Conservative vs. Progressive
Nationalism vs. Globalism
Government Assistance and Regulation vs. Capitalism

Our challenge as investment advisors is to view politics through an apolitical lens. Admittedly, that can be somewhat difficult during times like this when the daily conversation seems to be dominated by both parties' extremes.

There is no doubt that we are a divided country politically, but in a messy way it appears that collectively we have voted for checks and balances and divided government. President-elect Joe Biden will be sworn into office on January 20, 2021, but not riding the blue wave many had predicted. The Democrats will still control the House but by a smaller margin, and the Senate control will be decided by the runoffs in Georgia for both seats. The Democrats will have to win both seats to make it a 50/50 tie, which would mean Vice President-elect Kamala Harris would cast the deciding vote on a pure party line vote. Neither party will have a filibuster or veto-proof majority.

From a policy perspective, this means President-elect Biden will have to moderate some of his most progressive initiatives—most notably with personal and corporate income tax increases.

There does seem to be bipartisan support for a significant infrastructure bill, but we were hopeful for that during the early months of the Trump administration too.

President-elect Biden will likely use executive orders to reverse many of the orders signed by President Trump over the last four years and return the United States to the Paris Climate Agreement and the World Health Organization.

He will also attempt to reset relationships with key allies around the world, looking through more of a globalist lens than a nationalist one.

The China relationship will be a key challenge, and one big question is what will become of the billions of dollars in tariffs currently imposed on Chinese producers. Biden is known to be a China hawk on both economic and humanitarian grounds and is likely to use the existing tariffs as leverage when negotiating other policy objectives. Most economists predict China's economic growth rate will be significantly higher than the U.S. in 2021.

Most of the other Asian countries and Australia and New Zealand have fared better than the U.S. in battling the coronavirus, likely resulting in a more rapid return to economic growth there too.

Biden's engagement with Europe is more likely to resemble the post World War II relationship than during the Trump administration, particularly regarding trade.

One of the most important cabinet picks has been made for the Secretary of the Treasury, and it's a familiar name to the financial markets: former Federal Reserve Chair Janet Yellen. She has support on both sides of the aisle, and both she and current Fed Chair Jerome Powell have always been strong proponents of keeping interest rates as low as possible for as long as possible, even if it leads to higher inflation.

We are also likely to see a slimmed down version of Act Two of the CARES Act, with Congress currently in a fierce and partisan debate about the size of and priorities in the  package, which is likely to be around $1Trillion. The financial markets seem to be assuming that a lame duck bill will be passed soon. If they are unable to reach an agreement soon, the markets would likely express significant disappointment in the short term.

Investment Implications

The stock market tends to do relatively well during periods of divided government - Continue to overweight stocks relative to bonds

During extended periods of low interest rates, risk assets tend to continue to inflate in value - overweight stocks relative to bonds

A lean back towards globalism and away from nationalism - increase allocation to international stocks

Continue to prioritize credit quality over yield with bonds

Tilt towards municipal bonds for clients in the highest marginal tax brackets


Pandemic, Conspiracies, and Social Behavior vs. Vaccines, Therapies, Testing and Contact Tracing

Worldwide there have now been over 60 million Covid infections and 1.3 million deaths. In the United States, we will reach over 300,000 deaths by the end of the year. By any objective measure, the U.S. has not done an admirable job controlling and minimizing the devastation caused by this virus. And with infections and deaths spiking everywhere, it is most certainly going to get darker throughout the winter.

The extraordinarily good news is that there are now 3 vaccines that are beginning to be administered to those most at risk and new immunotherapies have proven to be an effective treatment for many. When the history books are written about this pandemic, the incredible work done by research scientists to bring vaccines to market with over 95% effective rates will be viewed as both a marvel and a miracle. The challenge over the next few months will be threefold -

  • Creating and distributing enough vaccines to reach herd immunity as soon as possible.
  • Convincing a large chunk of our population who are currently skeptical that the vaccine is safe and effective.
  • Following the CDC guidelines on social distancing, personal hygiene, and mask-wearing.

Investment Implications 

We are likely to return to a new normal with the economy fully opened sooner than the markets and experts were anticipating—

Increase allocation to value oriented cyclical stocks
Increase allocation to small and mid-cap stocks
Maintain but slightly reduce long term overweight to high octane "stay at home" communication, technology, and internet growth stocks

The Big Picture

When reviewing economic and investment research at the end of each quarter to consider allocation changes, the question we are trying to answer is, "What does this mean for the financial markets over 2, 4, and 8 years?" Notably, we never try to answer the question, “What does this mean for the market over the next few months?”

For the next couple of years, there will be a massive amount of federal stimulus injected into the markets through historically low interest rates, income taxes and deficit spending. While this is likely to bode well for the markets in the shorter term, eventually we will have to begin paying off the government's credit card and likely be doing so when the structural imbalances in federal programs (Medicaid, Medicare, Social Security, interest on the national debt) will be higher… as will the gap between rich and poor… which carries with it significant long term economic costs.

I am reminded that any discussion of the future always discounts the value of innovation, and there is no better example of it than what the pharmaceutical and biotech industries have done this year with therapies and vaccines. Necessity is the mother of innovation!

Put this all together, and it leads us to be a bit more optimistic about the potential of the markets over the next 2 to 4 years than we are over 8 years. No matter what storms might be waiting out on the horizon, we are prepared to sail with the winds at our back, and when they are smacking us in the face.

I hope you enjoy reading the messages from our crew below. Collectively this crew has over 150 years of sailing through storms created by recessions, market corrections, and now a pandemic.

Our best wishes for health, wealth, and happiness in 2021.

Brian Bernatchez, CFP®
Managing Director
P.S. Golden Pond turns 25 in September, and we are hopeful to find a way to celebrate in person with you!

News From the Golden Pond Crew

I hope this year-end update finds you all in good holiday cheer and optimism for the upcoming year. My family tried to make the best of the “pandemic” year. While the spring was challenging, we found our summer to be quite pleasant. Ray and I bought kayaks and travelled the state looking for remote lakes and rivers to enjoy. We discovered new hikes, beaches and lakes that we had not been to before and enjoyed a few old favorites. After living almost my entire life in Maine, I am again awed by the many places we discovered and the beauty all around us. Into the fall, with the nice weather, we continued to travel near and far and explore.
I think we have redefined our way of living for the time being and are staying in our little bubble which includes my daughter’s family. Our newest grandchild arrived in July – Charlie! We now have a rambunctious 3-year-old and              4-month-old! They are a joy to be with most of the time and other days, you are glad to send them back to mom and dad. Isn’t that the blessing of being a grandparent?
Golden Pond continues to put safety first and most of our team continues to work from home. As a company, we have really learned a new way to serve our clients remotely. 2021 marks our 25th anniversary at Golden Pond. I am looking forward to celebrating this milestone next year with our team and all of you. I hope we are all able to see each other                                                                         again soon.  Holly

It sure has been a strange year for all of us. I try to contemplate what good I can take away from 2020 and it keeps going back to "Gratitude”.
This year has been a struggle for so many people and I have been fortunate to stay employed and to have my family, friends and co-workers stay healthy.
We haven’t left the good old state of Maine this year but have had the chance to do some really nice hikes. Another thing to be thankful for is this beautiful state we live in.
Happy Holidays and Best Wishes for a Safe and Happy 2021!  Judy

As 2020 comes to an end, all I can think is how incredibly blessed and thankful I am! We have navigated through so many adjustments to our regular routines, but have remained resilient and determined to make the best of every situation thrown our way. I am so grateful for the Golden Pond crew for all their support so I can continue serving our amazing clients.
To the school districts, teachers and staff THANK YOU for all that you all are doing every day to keep our children safe and in school. Wishing you all continued health, happiness, and prosperity in the New Year!  Paige

2020 has been interesting, to say the least. The year started out fantastic, and quickly went to… well, you know the rest. Although our April vacation to Nashville was canceled, we were able to get out and enjoy the summer weather. My husband Joe and I went on several camping trips in our toy hauler/camper, allowing us to bring our motorcycle along. One particular ride we took, we rode the bike from Abbot, up to Rockwood, over to Jackman, down to the forks, and back to camp in 95-degree weather. It was such a hot day out, but it did not matter. The ride was so beautiful. We also went on a few four-wheeling rides with some great friends and family. I have got to tell you, side by sides are a blast! Now for some snow so we can take the sleds out next!
Maine is so unbelievably gorgeous. Every year, we are lucky enough to discover more and more of this beautiful state. As I sit here and write this, I think about all who have been affected by Covid-19. My heart goes out to you. I hope 2021 will be a better year for all of us. Peace and Joy to you and your families.  Danielle

Things here in the woods are very quiet. My deer hunting was not as successful as last year, but I managed to get the job done (between phone calls, of course) working from home does have its advantages.
I am looking forward to my daughter’s wedding in 2021, seeing my family and friends, and hanging out with my grandson Lenox. Todd and I are also thinking of moving from the deep woods to civilization. Time will tell. I hope you all stay safe and healthy, and I look forward to chatting with you soon.  Kelly

With all that’s happened in 2020, it’s hard to believe that Zach and I started the year out on the other side of the world…in New Zealand! We visited Auckland, the West Coast region, and Queenstown. It was a great trip and I definitely recommend adding New Zealand to your travel bucket list.
Early in 2020 I joined the Steering Committee for KV Connect, Waterville’s young professionals group. I’ve enjoyed getting more involved in the community and finding ways to stay connected while physically apart.
The highlight of this year was welcoming baby Charlotte. In May, we had a covid-friendly drive-through baby shower, which turned out to be so fun and memorable! Charlotte arrived the day before her due date on July 16. Somehow, she’s already almost five months old and is developing quite a personality. She smiles often (especially at her dad) and has started babbling and giggling. Despite the sleepless nights, Zach and I have loved becoming parents.
Zach is in his fifth year at Trueline where he is a Managing Content Coordinator. He has worked from home since February of 2019 and was a little relieved to have some company when I joined him in March. Home became the center of our world this year, and we’ve become a great “quaran-team.” We have also rearranged furniture more times than I can count. Wishing you all health and happiness in 2021!   Katie

2020 has been quite the year for all of us. Fortunately, we have been able to move forward and are now getting ready for 2021.
While the pandemic has changed our lives with less social interaction, it has also provided us the opportunity to focus on what is truly important both in our families and in our business. Technology allowed us to shift from being in the office to working at home and then being able to work from anywhere. It has changed the way we serve you for the better, and while I have become a “Zoom Pro”, I look forward to our meetings in person. The fall of 2021 will mark our 25th year in business, and you will be hearing more from us about how we celebrate that milestone.
Jose’ is now 25 and continues to work at Regeneron Pharmaceutical in Albany, New York. He recently bought a house with a friend, and they have been fixing it up. He is nearing the completion of his Masters in Bioinformatics from Johns Hopkins and gets home as often as possible.
Gaby is a senior at Stonehill College and was chosen captain of her hockey team. Unfortunately, due to Covid-19, the hockey season was canceled. She will graduate this spring with a degree in health sciences and will be applying to Chiropractor School. She was able to return to campus this fall and is now home with Josh for the next two months. I hope that we have a normal graduation for her this spring.
Joshua is a freshman at UMaine and is studying Chemical Engineering through the Maine Pulp and Paper Scholarship program. He has an internship at SAPPI next summer and is looking forward to working at the plant in Skowhegan. His senior year of high school was not what he expected – the lacrosse season was canceled, and graduation was altered considerably.
Sara and I are now (or were) empty nesters. Her mother passed away this summer after a long battle with multiple health issues. Sara was elected to the RSU #18 School Board this past fall and is enjoying being involved with the school district. She is also working with some of her former classmates at the University of Puerto Rico to improve the engineering department. Family and education have always been her biggest priorities.
While Covid-19 has put a damper on our lives, many of us have continued to work and do the things that matter most to us. Ice rinks and the outdoors are at the top of my non-work list items.
Last year we had our most successful pond hockey tournament (the Maine Pond Hockey Classic) ever, and we will try to pull off a scaled-down version this year that meets the social distancing rules. I am involved in a project to bring a refrigerated rink to the Alfond Youth and Community Center, for which we are in the planning stages. Meanwhile, we once again have set up a rink in Castonguay Square through the Children’s Discovery Museum and have a synthetic ice rink inside the AYCC so that the members of Central Maine Youth Hockey have a place to practice and the AYCC youth will learn how to skate.
I continue to serve on the Belgrade Lakes Association (BLA) Board as we seek to remain vigilant about the water quality on Great and Long Ponds. Through the 7 Lakes Association last February we held a Moonlight snowshoe that was a success and got around one hundred folks out on Great Pond for a moonlit walk. Keeping our lakes and streams clean and healthy is always something we will support, and Golden Pond once again sponsored the annual BLA meeting though this year it was virtual. This summer, there were more people than ever enjoying our lakes as other options were limited.
My place in Lily Bay is now powered by solar. It is great to turn a switch and have power throughout the camp without starting a generator. This year was a great year for social distancing in the Moosehead area - though it too was more crowded with folks escaping from the cities. We plan on spending plenty of time up there this winter.
We are fortunate that we have plenty of space on our property. I used the time without social interaction to clear our snowshoe trails with my neighbors. I am getting ready to start grooming them now that we have received the first snow. We also set up a disc golf course, and I have continued to have our driving range so that while we couldn’t go out – we did have plenty to do during this pandemic. As I write this, we are waiting for the ice to get thick enough on our pond to start skating.
I am a realistic optimist. We all know things will improve given enough time, and we need to look for any positives in this pandemic as we prepare for the future. One of my favorite articles, “fewer, richer, greener” by Laurence B. Seigel for the CFA Institute in 2015, has been expanded to a book. It is a bit dry reading, but if you get a chance, give it a go. He outlines through documented facts, how the world has dramatically improved throughout history and lays out the case that we will continue to see life get better for all humanity.
Happy holidays and have a great New Year!  Bert

2020 is a year in which the Bernatchez bunch has counted its blessings, and like so many of you kept family close and pretty much  everyone else at a distance. This year, I feel fortunate to live in a rural state and own a business that can operate remotely until the pandemic is over.
Amy and I have discovered fall in Maine this year! For the first time in 25 years, we did not spend our weekends on field hockey and football fields, coaching and watching our kids play. We spent a lot of time at our place at Sugarloaf mountain biking and hiking, and no, I still can’t keep up with her! We are looking forward to hitting the slopes and trails this  winter.
Katie and Zach made us grandparents this summer, and Charlotte has her Pops wrapped tightly around her tiny finger already. Katie also passed the Certified Financial Planner (CFP) exam soon after returning from maternity leave, and we are all so pleased to have her rejoin our team.
Kristy is in her first year at Physician Assistant (PA) school at the University of New England and lives within walking distance of the Portland campus. Amy’s father was a family doctor, and Kristy’s Aunt Laura is a PA - both have provided her with inspiration and guidance, as has her own experience in dealing with injuries as a high level student athlete.
Jack graduated from MIT this spring with a degree in computer science engineering. He is currently living in Boston and pursuing a master’s degree at MIT while conducting research and working as a teaching assistant. When the pandemic hit this spring, he and a few of his college buddies quarantined and went to school remotely at our Sugarloaf place.
Amy continues to be one of the leading real estate agents in the area, and I am amazed at her attention to detail in providing caring service to her clients. She serves on the Alfond Youth and Community Center board of directors and will become chair of the board in 2021. She is also being inducted into the Maine Sports Hall of Fame this year for her service as a field hockey coach. In her spare time, she is the center of our family’s universe and my soulmate and best friend. In 2021 we will celebrate our 30th wedding anniversary.
I continue to enjoy my service on the Boards of Thomas College, The Maine Community Foundation, and the Alfond Youth and Community Center Founders Club. I spent most of my spare time in the spring shutdown building new trails around our property, discovering great shows on Netflix (especially Ozark and Peaky Blinders!), and reconnecting with old friends, music, and books.
It does not seem possible, but we will soon begin planning for a year of celebration as Golden Pond turns 25 next fall! This year more than any other, I am grateful for the continued trust you place in us to grow and protect your family’s treasure. The Bernatchez bunch wishes you and your family health, wealth, and happiness in 2021.  Brian