'It might be decades before we understand what transpired here'

CIO prepares for half the economic growth we were expecting and bemoans the effect ETFs are having on the market

'It might be decades before we understand what transpired here'

ETFs and algorithms are exacerbating market volatility amid an economic situation that could take decades to fully understand. That’s the view of Gerry Frigon, president and CIO at Taylor Frigon Capital, who is braced for a long-term hit to economic growth.

The true impact of the COVID-19 virus is a murky picture. South of the border, while president Donald Trump has banged the drum and declared the U.S. will be back better than ever next year, Fed chairman Jerome Powell had a more sombre take.

On Wednesday, he downplayed the jobs growth in May and instead focused on the millions of Americans still out of work, suggesting it would take years for a return to anything like the strong labour market the country enjoyed before the pandemic.

“We have to be honest that it’s a long road,” Powell said. “It’s - depending on how you count it - well more than 20 million people displaced in the labour market.”

While the Fed expects the economy to begin to recover from its government-imposed lockdown in the second half of the year, they see unemployment falling slowly - to 9.3% at the end of this year from May’s 13.3% - and don’t envisage it returning to anywhere near its pre-Covid-19 rate of 3.5% by the end of 2022.

Frigon believes the total cost of the pandemic to be upwards of $10 trillion and expects long-term ramifications.

He said: “While we don’t think this will lead to a crash, there’s likely to be an ‘opportunity cost’. We think the long-term impact will be slower economic growth, maybe half of what we were expecting over the coming years​, and it might be decades before we completely understand what’s transpired here and what the consequences will be.”

While the economy is pummelled, markets – confidence boosted by huge amounts of government stimulus – have experience a bear market rally, albeit one susceptible to sharp down days as yesterday proved. Frigon lamented the effect ETFs and machines have had on the ability to trade.

He said: “We had difficulty buying stock on one of the most devastating days in the market – no shares were available. We’ve never had issues buying stock in the past when the markets are collapsing, which is a stark example of a market mechanism that is broken.

“We’re dealing with a market that is two-thirds algorithmic - it’s not people trading but machines and this is creating a higher level of volatility. A total of 35% of all assets in the equities markets are ‘passive’ which means people aren’t making fundamental decisions on the business. This is exacerbating market issues and creating a situation that’s making it difficult to navigate markets on a day-to-day basis.”