September 2023 – the past three years…

These Past Three Years…

Many of the worst market events in history have occurred in September and October.  Ominous, right?  Is the potential/averted/potential government shutdown the catalyst for a dramatic pullback?  Perhaps you are considering whether you should take action and adjust your investments to avoid or take advantage of whatever near-term crisis awaits.  In my view, and this may come as no surprise, the answer is an emphatic no.  Investors should focus on the future: where will markets be in five years, ten years, or many more. 

Keeping your eyes on the long-term is pretty standard thinking for wise investors.  But the past three years have been so fraught with unthinkable crises, it was near impossible to think beyond the immediate- to very short-term.  Recent years have presented us with a remarkable basket of horrors.  But these dramatic events are well-known to the massive information processor that is the global stock (and bond) market.  These crises are “priced in.”  It is time to shift our attention from the immediate-term to the themes that are likely to shape the world in the years to come.  What does that mean?  Let’s consider.

We’re in new territory: pandemic shutdown/reopening.
The context overlaying all continues to be the overall response to the COVID pandemic.  Remember, this was an unprecedented event in all of human history.  Never before have the major economies coordinated to shut down almost all economic activity, then pump in trillions of dollars in stimulus, and then open it all back up.  Much of what we face today in the economy and markets can be traced directly back to this global shock. 

Because it is unprecedented, it’s been very hard for economists, analysts, and investors to explain and predict what might happen next.  Take for example the recession that has been predicted and postponed for many months, and now might not actually occur.  The metrics that in another era gave certainty about a coming recession have proven inaccurate.  The data of today do not have reliable apples to apples comparisons.  We’re plotting a new course.

Evidence of resilience, though worries persist
With things so hard to read, many are seeing what they want to see, or what they most fear, in today’s markets.  As always, no one knows who’s right and only time will tell.  Someone will emerge as having been prophetic (they may have only been the broken clock that’s correct twice a day).  On the other hand, I wonder if what we’re seeing is another example of the resilience of humans and the macroeconomy in which we work.  Yes, there is much to worry about: land war in Europe, the hottest summer on record, stubborn remnants of inflation, unending dysfunction in Washington, growing impact of striking workers, etc.  But there are also very strong positive forces that simply are not present in a full-on recession:   persistently strong labor market, strong consumer spending, falling inflation, stable financial system, etc.  And, the year of an election cycle is often positive for the economy as the incumbent pulls any levers available to promote growth and help reelection.

Shift to long-term themes instead of immediate crises.
One problem from all of the intensity of recent years has been that many individual investors had their attention riveted on the immediate crises unfolding in real time around us.  How bad will the pandemic become?  Will the COVID stimulus bills get passed?  When will vaccines become available?  How high and fast will the Fed raise interest rates?  What will happen in Ukraine?  Events of the recent past have been very consequential and at times required portfolios to be adjusted and repositioned in order to seek opportunities and mitigate declines. 

Now as we begin to find our way out of this cold and lonely forest, it is time for investors to return our attention from days and weeks to the long-term horizon of years and decades.  Successful investors focus on important themes or trends that may transform society and the global economy in the future.  Instead of reacting to the crisis of the day, it is time to consider whether portfolios are positioned to ride the potentially dominant trends:

• Demographics.  The nation’s average age, ethnicity, marital status, education, population growth rate, etc. are all evolving coincidentally towards an increasingly different makeup than in decades past.  What will all of this mean for companies and society as different groups gain/lose influence and prominence?
• Technological innovation.  The world of ten, twenty, fifty years from now will be in many ways almost unrecognizable due to the innovations that are emerging or as yet have not even been imagined.  At the same time, we will still be human beings with all of our ancient innate needs, gifts, and shortcomings.  How will we thrive, prosper, and struggle in this evolving future?
• Geopolitical/global alliances.  The decline in US global preeminence has been predicted for decades.  How will the relative influence and wealth of America evolve as other powers rise, fall, form alliances, and split apart?  Will the countries of China, Russia, Iraq, etc. form a durable competitive bloc?  Will America continue to confound and outlive its detractors?  Or is there a more complex and varied outcome.
• Power to the People.  The rise of citizen-driven movements may continue to have dramatic impact on communities and thereby shape the broader society, economy, and government.  Examples of this include worker strikes in the auto, healthcare, entertainment, education sectors, and others.  Also local political activism and community organizing.  The #metoo movement.  The present-day government shutdown and so on.  As members of these movements express and build influence, how will investors/investments be impacted?  How will this change consumption, taxation, investment, growth?
• Climate change.  After a sweltering summer of storms, floods, and drought, does anyone still actually disbelieve that systemic change is underway?  Will our collective responses to increasing climate related crises be enough?  Will technology and policy changes lead us to a resolution we can live with?  Are there really any alternatives to ultimately taking action, eventually?  Or will our talents combine to create lasting if imperfect solutions?
• Immigration/migration.  Related to demographics and climate change, as people living throughout the world vote with their feet, will migrations of masses of people one day settle into some relative equilibrium where enough people live where they can find satisfactory conditions?   What happens to the countries left behind?  Internally, what happens to regions moved to/from?  Does this all reach a stasis of some sort?
• Deficit spending.  I wrote a paper in college in the late 1980s about the crisis of the growing US federal budget deficit and debt.  Looks like it didn’t much impact policy…   The problem is worse than ever.  Do we ever reach a non-theoretical limit to the size of the US debt?  What do we do when we reach that point?  Or does US dollar hegemony enable us to perpetually postpone that tipping point?

What to do?
How should investors shift attention to long-term themes from short-term crises?  The answer might strike you as mundane.  A stable, diversified portfolio, with allocations to potential growth areas and dividends to reinvest has been practiced by patient investors for ages.  Slow and steady returns, with periodic housekeeping and harvesting will likely provide the opportunity for long-term compounding.  Let’s not get too upset during downturns, nor too aggressive during boom times.  If investors can avoid large losses when markets fall, and not overcommit when markets rise, then we can give our assets the time required for compounding to work its magic.  This process is likely to take some time, but the outcome is likely to be durable.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.   

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. 

Stock investing involves risk including loss of principal.  Asset allocation does not ensure a profit or protect against a loss. 

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.  

The data included is developed from sources believed to be providing accurate information.