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“Lashed by a squall of historical events over four harrowing years, exhausted Americans longed to catch their collective breath as Election Day approached” 

This quote is not taken from any media source dedicated to the 2020 US election, but instead describes the mood of the electorate as polling day approached exactly one hundred years ago. The four years leading up to the presidential election of 1920 had delivered a torrid period of world war, disease, terrorism and unemployment. More than 100,000 Americans had lost their lives fighting in Europe, and an estimated 650,000 further lives were stolen across the US as the global influenza pandemic took hold. The fabric of American society was also fraying as race riots, nationwide labour strikes and terrorist bombings ripped through American cities following the war. To add to the air of uncertainty, the economy was faltering, stock prices were falling and unemployment was on the rise. Americans were bitterly divided over whether to join the League of Nations – the forerunner of today’s United Nations – with many wanting more focus on domestic issues, rather than international. Further woes had been created by the Russian Revolution in 1917, sparking fears about the spread of communism. Even news around sports and the weather weighed heavily on the national psyche; the 1919 World Series had been tainted with accusations of game-fixing and a cluster of nearly 40 tornadoes struck from Georgia to Wisconsin on Palm Sunday in 1920, leaving more than 380 dead.

By June of election year, America was wrapped in a sense of widespread upheaval when the Republican Party held its convention in Chicago and elected a first-term senator – Warren Harding – as its presidential nominee; on the 10th ballot. Labelled the ‘best of the second raters’ by senior Republicans, Harding had positioned himself as a safe choice and as someone who could soothe the country’s jangled nerves. While road-testing themes for his candidacy, Harding used both the terms normality and normalcy in searching for the right word to convey the state of affairs he, as the potential president, hoped to establish. He settled on normalcy. 

“America's present need is not heroics but healing; not nostrums but normalcy”

This nostalgic pledge to ‘Return to normalcy’ became the slogan and theme for Harding’s presidential candidacy, described as a ‘front porch’ campaign conducted from his home in Marion, Ohio. 

Harding’s personality and small-town appeal spoke to the times; he won by one of the largest landslides in American history, to become the 29th president of the United States, carrying 37 of, the then, 48 states. In keeping with his campaign theme, Harding declared in his inauguration address; 

“Our supreme task is the resumption of our onward, normal way”

But how do we define normal

You may be pleased to know, the remainder of this VFTD is not dedicated to discussing the 2020 US presidential election – that would be too predictable. Our interest in Harding’s winning campaign story centres on the appeal a ‘return to normal’ slogan had on the US public. This in the context of many of us now yearning for a return to normal, in the midst of the coronavirus pandemic.

The dictionary definition of normal is ‘conforming to type, standard, or regular pattern’. However, there are no formal rules to indicate what conditions define normal. According to sociologist Allan Horowitz, those who wish to identify normality commonly turn to one of three alternative definitions. The first is a statistical view; where the normal is whatever trait most people in a group display. The second is linked to the Latin – norma – referred to as a carpenter’s square, enabling tradesman to establish a perfect right angle. The ‘norm’ provided a concrete standard that, if followed, ensured the user reproduced a specific pattern. The third is linked to evolutionary science and what is normal for a human being and the behaviours which make us fit to survive in our particular niche. These three definitions of normality – (1) statistical, (2) aspirational, (3) functional – often slide into each other during everyday conversation. This is particularly applicable in how we might think ‘the new normal’ might look, once the virus is under control. Many of us will go back to what we were doing before the pandemic struck (1), but our societies will make changes for the better (2), which will end up being good for the survival and prosperity of our communities (3).   

Does this mean we want to go back to where we were, but also kind of don’t? We might want things to be the same, but realise we need them to be different. We want to return to normal but we know, deep down, our journey will not be a return to the past – but an acceptance we have departed to the future.

Implications for portfolios

Thinking about a return to normal, or what the new normal will look like, brings us to a theory used in finance called mean reversion. This argues that asset prices and historical returns eventually revert to the long-run average, or mean. This mean can apply to other averages, such as economic growth or the average return of an industry or sector. At the heart of various investment strategies – especially value investing – is the concept of mean reversion. It relies on an expectation things will return to normal; in other words, that sales decline or the hit to profits simply won’t last. This approach potentially brings profits for the investor who ‘kept the faith’ during the storm, or takes advantage of investing in companies whose bonds or shares are beaten up and will mean revert when things go ‘back to normal’. 

Since the arrival of Covid-19, we have seen many having to adapt to a new ‘work from home’ environment. Given that necessity is the mother of invention, this new reality has taken shape more quickly and with more ingenuity than would have been the case without this crisis. As investors, we have been asking ourselves what the consequences are for the future of work and how this will impact cities, real estate, and the small businesses relying on office workers for clients. We accept this short term transformation will have long term detrimental effects on many established businesses and industries, but also grasp the significant opportunities that have emerged or been reinforced for others.

It’s still quite early to estimate the long-term impact on urban centres, but the negative implications for commercial real estate are quite obvious. Less office space is needed if a large share of the workforce stays home or if businesses adopt a hybrid model, where employees only come in a few days each week. Commercial real estate is already starting to show signs of stress: be that share and bond prices or anecdotal evidence from speaking with clients whom are negotiating their leases on terms unthinkable before the crisis. Loan delinquencies are on the rise, markedly so for those associated with retail and hotel property. Small businesses in city centres relying on foot traffic and office workers  as  their  key  clientele  will  need  to  shift  to  a  new business model with increased focus on e-commerce. We believe assuming a return to the norm is erroneous, as an irreversible, secular shift in human behaviour is underway. Investors pinning their hopes on a reversion to the mean will be disappointed to discover that normalcy is not returning. 

Please do contact us with any questions. 

Julia Warrander and Russell Waite

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