The past decade has been kind to equity investors. Returns from stocks flattered investment portfolios by delivering a compounded annualized return better than 10% (using the S&P 500 Index as a proxy).
- The U.S. equity market benefitted from any number of things over the past decade, including lower inflation and interest rates and a strengthening labor market.
- Investors should look for dynamic shifts that may be taking place that could alter the path of the past.
- Loose central bank policy is among the reasons to stay bullish on stocks today.
Making money was rather uncomplicated as long as you invested in U.S. stocks. This is where the argument breaks down a bit, however. If one waded into overseas stocks, as history suggests one should for purposes of diversification, and to augment returns,
the results would probably have been more disappointing. Non-U.S. equities increased at a less-than-stellar mid-lower single-digit pace predicated upon the distribution between developed and emerging market equity bourses.
Furthermore, if an investor waded into commodities, a big winner in the first decade of the 21st century, the returns realized during the past 10 years were not likely above break even. In fact, if you look at the preceding decade, you could flip the outcome over, with U.S. stocks failing to produce gains while commodities and international equities were the best performers.
So rather than spilling more ink on what was, the question begs what’s next?
There is a famous quote attributed to one of the greatest professional hockey players of all time, Wayne “The Great One” Gretzky. When asked what makes him so good, he responded: “I skate to where the puck is going to be, not to where it has been.”
Adapting to Market Shifts
Granted, easier said than done, but the translation for investors is to look for those dynamic shifts that may be taking place that could alter the path of the past. There is academic support for
the theory of momentum—the likelihood that a security’s price will continue to trend in the same direction for extended periods. It is actually a tenet of technical analysis and there has been plenty of research supporting its efficacy.
However, using the momentum factor, or even Newtonian physics, which describes in the Law of Motion that a body in motion will tend to stay in motion unless acted upon by an external force, suggests a change in direction is an eventuality.
Therefore, what might that force be?
Perhaps the reset of economic activity as an effect of policymakers’ efforts to triage the global pandemic. The economic collapse caused by the lock down of countries around the world led to a decline in activity that was unprecedented.
Subsequently, monetary and fiscal officials responded swiftly with massive relief packages. The stimulus, along with the release of natural pent-up demand driving consumption, has contributed to a measured and synchronized rebound globally. While the loss of output caused by the shutdowns and general diminution of business activity will likely be regained in late 2021, or perhaps 2022, the worst of the damage has seemingly passed.
The U.S. equity market benefited from any number of things over the past decade:
- non-threatening levels of inflation,
- low interest rates and a supportive central bank,
- a strengthening labor market,
- sector biases that make the domestic equity market attractive for global investors allocating risk assets in the midst of uncertainty,
- and domination by secular growth companies in sectors including Technology and Health Care, to name a few.
A Flexible Approach to Investing
All of this leads us to the current economic situation.
What if all of the stimulus and recovery to a more “normalized” economic expansion actually works?
What might the post-pandemic recovery look like, particularly given the fact the economy will remain a beneficiary of a wide-open monetary spigot and positive fiscal impulse well beyond the point it is necessary to facilitate a self-sustaining economic expansion?
Of course, this might not occur in the very near term. Instead, it is a process that takes time to emerge, but one that could ultimately last for years. Markets, however, will be quick to sniff out the dynamics of these potentially structural changes.
Higher inflation, and possibly higher interest rates, should benefit those areas that have had a propensity to perform well in such environments, namely cyclical and resource stocks, especially across the emerging market complex, and commodities.
Having a flexible investment charter, which we possess by design in our multi-asset strategies, should position us well for a regime change that may not work as favorably for those who rigidly adhere to only beating a naïve U.S. benchmark, which also happens to be last decade’s leadership.
Why Investors Should Stay Bullish on Stocks
Among reasons to be bullish on equities, loose central bank policy is an important one. Even better, is a monetary setting that is biased toward being loose and loosening. In our view, it
is entirely possible that our Federal Reserve has expanded its policy framework for stimulating growth to engender employment gains and higher inflation just as the U.S. economy is embarking on a secular transition to a more inflationary environment.
The following supports this view:
- Consumer deleveraging is mostly over and balance sheets are being repaired. Improving employment conditions will boost confidence and, in turn, lead to a resumption of spending at a healthy clip.
- Fiscal austerity has been abandoned and the election outcome will likely not jeopardize the growth in governmental spending on public investment projects among other things.
- The recent weakness in the U.S. dollar could go much farther, which breeds an inflationary scenario, particularly as it relates to import prices of tradeable goods and commodities.
- Deglobalization and the repatriation of manufacturing can lead to supply-chain disruptions, higher production costs, and thereby, likely increasing cost-push inflation.
This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.