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Many are still mistaking the coronavirus crisis for another 2008. It is not. This is because the terrain upon which the virus landed is far different. No major global imbalances existed in early 2020. Consider that the 1930s depression was a classic credit crunch, exacerbated by counterproductive policy measures and protectionism. The bursting of the technology bubble in the late 1990s had its root in financial excesses and capital overspending. The crisis in 2008 was a perfect storm with the bursting of a major asset bubble and years of financial deleveraging afterward. What do all of these have in common? Deep financial imbalances that took years to work out.
By early 2020, most financial imbalances had largely been worked out in the post-2008 crisis period – mainly due to the deleveraging of the American and European consumer. That meant, should the threat of the virus recede (as we are working through now), the cyclical rebound would be immediate and explosive.
As it was, the pandemic offered a rare opportunity to kickstart sluggish economies. Yes, the global supply chain is currently a snarled mess. But it’s also an enormous opportunity for durable productivity gains. In America, we are now witnessing the strongest capex cycle since the 1940s. Measures from other countries and regions show similar dynamics.
On the consumer side, another missing feature of previous recoveries has now appeared: wage gains. In fact, wage growth has been the highest at the lower end of the income scale. This is where the marginal propensity to consume is higher and will trigger a sustainable pickup in velocity. Global consumers also have far more robust balance sheets, with more savings to be spent earlier in the cycle. All of this adds up to an economic cycle that is not only likely to last for several more years, but will also see higher GDP growth than the last decade.
Enough data points support a robust economic cycle. Yet most investors end up anchoring on the prior regime, assuming that the “secular stagnation” era of 2009-2020 and the associated investment leadership (U.S. assets, Big Tech, bonds, etc.) will remain in place. The reality is that much of today’s asset pricing still reflects the disinflationary trends of the last 40 years. But investors need to position for an investment regime change of higher growth. That means broadly staying with a reflationary bias and cyclical-orientation in portfolios.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2022 Super Trends: World in Transition” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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