Abrupt changes can be unsettling, while slow changes make it hard to see some of the positives that have occurred, for example in technology and science. In the investment and economic landscape, we think there are a number of shifts taking place that some might view as negative, but we believe in most respects positive cases can be made. Some of these changes we began talking about at the start of this decade more than two years ago. Others are more recent. These are the types of secular changes that historically would take many years to occur, but in this faster paced world we think it is prudent investors are prepared for changes to occur more quickly.
Passive investing to lose ground to active investing. For at least the past decade most market indexes have been dominated by and driven higher by a handful of very large technology stocks. Stocks as a whole had a variety of tailwinds pushing nearly all higher. We think investing in low-cost passive funds has a place in many portfolios, but the current and potentially future environment seems ripe for active managers to find opportunities and perhaps more importantly reduce risk.
Growth investing dominance over value. Going back over many years value investing often outperformed, but that changed significantly this past decade. Over the past 18 months value has finally started to show some relative progress versus growth. We are open minded to both categories, but believe a change towards investing in companies based on actual fundamentals would be a positive versus much of the speculation that has occurred in unprofitable companies in recent years.
Low interest rate environment shifting to higher rates. Clearly this has already begun as the 40-year decline in rates seems to have ended when many declined to 0%. This does not mean interest rates shoot straight up, but the trend has changed. Interest rates effect many aspects of financial markets, some negatively, but savers should view the higher rates as a positive because they can now earn interest on their cash and bonds.
The Fed providing liquidity to now taking the liquidity away. Fighting the headwinds of tightening fed policy is already proving challenging for financial markets, so we won’t claim the Fed raising rates by itself is a positive change. We do think however, it will ultimately be a positive if the fed can get back to a more normalized stance that does not include 0% rates and massive quantitative easing/tightening.
Low inflation era to a higher inflation period. After many years of only 2-3% inflation in the U.S. the past year has seen inflation jump for a variety of reasons to levels not seen since the 1980’s. We would be hard pressed to find many positives of inflation at these high levels. However, from an investor standpoint it is critical to know how the fluctuating levels create both opportunities and risks in portfolios. For example, which companies have pricing power to raise rates and which are hurt by rising costs?
Goods produced internationally shifting back to the U.S. For multiple decades now U.S. corporations had been moving production of many goods to other parts of the world to reduce costs. The pandemic and other factors have started shifting some of this production back to the U.S. While this is likely to increase many costs, it does have the long-term positive effect of boosting the job market.
There are certainly many other factors changing now and likely in the years ahead. Many of these will create both opportunities and risks for investors and businesses alike. Record low numbers for consumer sentiment surveys despite a strong job market indicate many are worried about these changes and many other factors. While that is understandable, we think it is more beneficial instead of wishing things wouldn’t change to knowing what you should or shouldn’t do about it.
Now is a good time to evaluate if your financial plan and asset allocation still align with your goals. It is also more important than ever to invest in a disciplined investment process that you can believe in. This will allow you to better stick to the plan and have a better chance to have benefited from the various changes that may occur.