Follow Themes not Storylines
As the presidential election cycle wears on (ugh), dramatic and startling storylines are attracting much attention. To name a few: recent convictions of the former president and the current president’s son; partisan reactions; ongoing wars in Ukraine and Palestine; interest rates staying higher for longer; widespread dissatisfaction with the economy; dismay over the choice of candidate for president; the tenor of national discourse. These and many other grim narratives, both imagined and very real, appear to have left many citizens with a sense of unsettled-ness and gloom. Investors have asked me how we should think about this moment. “The market hates uncertainty” as they say, and these are uncertain times. Should investors do anything to prepare? Should we reposition relative to uncertainty? I’d say no.
With so many intertwined narratives in play, it seems we are within a historical moment of societal flux. Concerned citizens often express bewilderment as they long for simpler times (were those times in fact simpler? That’s a topic for another essay). While citizens might feel moved to activate and get busy, for investors, it may be wise to step back and keep it simple. Follow what matters most for markets and try not to become distracted by the grave storylines of the day. What matters for markets? As mundane as it may sound: over the long-term, markets are likely to follow corporate earnings, eventually.
The outlook for corporate earnings can be considered in terms of the dominant themes that will shape the US and global economy in the years and decades to come. Don’t forget that we are part of a dynamic interrelated economic ecosystem, driven by several dominant themes. In the years and decades ahead, it is likely that various corporations will find their way to survive and even thrive. The task for investors is to deploy their assets such that they can seek wealth goals while managing criteria such as risk, volatility, and personal preference.
Let’s consider dominant themes:
Demographics. “Demography is destiny.” This truism attributed to French philosopher Comte infers the potential difficulties inherent to societal evolution. The aging population in the US is impacted by increased longevity, declining replacement (birth) rates, and immigration are set to have profound impact on who lives in America over the coming decades. The political, social, and economic outcomes of this change will most likely be profound.
New political/economic era. There is much being written about how the US societal/political framework is in transformation from the Reaganomics/Neocon era to something more populist, with entitlement, tax, industrial, and trade policy focused on the American middle class. One can imagine many potential winners and losers of this. The current expressions of this new way can appear (dramatic) bordering on violent, and will likely to lead to a dispersion of outcomes for various different groups.
Re-globalization. Recent declarations that globalization is dead seem premature. Humans have been involved with cross border trade/comparative advantage for millennia. But there is dramatic change underway. One of the lessons from the recent pandemic shutdown was that our global supply chain system was more fragile and vulnerable than many of us had understood. Diversification and reconfiguration of supply chains is a way to address these risks. Cost will always be an important criterion for producers looking to source their production lines, but other criteria seem to have increased in importance. It appears that sourcing has been reduced from China, while sourcing has increased closer to home in places such as Mexico and within the US. Trade policy has evolved to support and encourage these transitions and a revival of US manufacturing may be enhanced. This could be positive for job growth in some areas, and also could mean protectionism and pressure on inflation.
Technological innovation. The evolution of technological advancement moves ever forward. Much is reported currently about the transformative impact of AI; it’s been called the next industrial revolution. There are other innovation trends that may not be as far-reaching, but will have substantial impact. For example, medical technology advancements such as personalized medicine and nanotechnology; the transition from carbon-based to green or sustainable energy economy; the transition from internal combustion engines to electric vehicles is gathering steam (okay, pun intended); space exploration; ____. The impressive outperformance of large cap tech can tempt investors to concentrate into that sector. This is likely a high volatility strategy, remember that the NASDAQ lost some 33% in 2022.
Sustainability and climate change. The pushback from interest groups on policies and efforts to address climate change can seem irresponsible and shortsighted. But it may be inevitable for legacy industries and infrastructure to seek protection as the society makes hard and inevitable decisions. Another part of this process seems to be that those most deeply engaged in the field of environmental engineering and innovation are beginning to strike tones of hopeful and positive potential outcomes rather than the earlier discourse of disaster which was almost debilitating.
Dollar dominance. The long-predicted demise of the US dollar as primary currency for the world has not yet come to pass. Innovations around cryptocurrencies and government-sponsored digital currencies may become the replacements for the dollar. Or not. For now, the US economy, even with all of its problems and crises, remains the most productive and rich economy in the world. While this relative outperformance persists, the US dollar is likely to continue to be an important currency. And, for what it’s worth, it may not be the worst thing that could happen for other economies to advance such that global stability and economic performance are more widespread.
How should investors follow these themes?
Diversification rather than concentrated bets. The themes described above are likely to be expressed over time across a range of industries with various winners and losers. If your objective is to have reasonable growth with volatility you can live with, then diversification in terms of company size, sector, growth profile, etc. will likely suit you well. This is the slow and steady approach and it is the one we follow with our clients.
This isn’t anything you don’t already know. The benefits of diversification can take time to play out (years of steady compounding). There can be times when a concentrated approach looks more savvy and like it might offer faster growth. But periods of concentrated growth have historically also been accompanied by collapses and underperformance. The accompanying volatility might not be too great for most investors. In summary of an essay by Capital Group, an alternative to get-rich-quick schemes is to get rich slowly, and stay rich.
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.