In his book, Thank You for Being Late, Thomas Friedman describes how the pace of change in technology has now exceeded human adaptability. In addition, Friedman writes about the remarkable accelerations in globalization and climate change, which have presented their own challenges for markets around the world. He summarizes that people in developed countries now must become lifelong learners in order to improve their adaptability to change…the days of graduating from high school or even college and expecting that you’ve learned everything you will need to know for a long and successful career are over.
Rob Arnott of Research Affiliates coined the phrase “3-D Hurricane” to describe the interconnected impact of large deficits, high levels of debt, and shifting demographics on future long-term economic growth and capital markets.1 He argues that all developed economies are facing the 3-D Hurricane to some degree, which is likely to stymie growth and lead to disappointing returns in mainstream investment assets, such as stocks and bonds.
In the U.S., like many other developed countries, our working age population is dwindling as the Baby Boom generation retires, thus reducing worker productivity. The high debt to GDP ratio, as well as the accumulated and projected deficits, of many countries will be a very real headwind to future prosperity. Arnott contends that the 3% GDP growth rate that had been considered normal in the past is simply unattainable, given the 3-D Hurricane, and that the future long-term economic growth will fall to a rate closer to 2%. We’ve seen these factors, and others, play into the growth rates of the past 9 years, even during a strong bull market for stocks in the United States.
During the first quarter of this year, extreme volatility returned to stock markets around the world as the primary influences behind the recent long bull market (free trade, technology, and low interest rates) are now perceived to be threatened.The Trump tariff war rhetoric is a threat to free trade across global markets and potentially inflationary, which would likely lead to higher interest rates.The recent privacy and data breaches of Facebook and Amazon have investors speculating that additional regulations may be on the horizon for the entire technology sector. The stimulative central bank policies around the globe are slowing, which may also lead to higher interest rates in the future.
Each of these “triple threats” are real and concerning for future generations. Interestingly, the subtitle of Thank You for Being Late is “An Optimists Guide to Thriving in the Age of Accelerations.” We have the ability to make positive change to help us adapt to any of these triple threats. We can use technology in positive ways to help overcome the negatives associated with extreme connectivity. We can adopt proactive government and private business policies to reverse the consequences of climate change. We can recycle, buy organic food and drive energy-efficient vehicles. We can initiate policies to address excess debt and deficit spending. We can vote for politicians that promote free trade. We can choose to invest in areas that promote sustainability and that could be less affected by the long-term 3-D Hurricane. We can all vow to never stop learning new things!
2018 Q1 Market Review
After over a year with nearly no volatility, the markets had a set-back in the first quarter of 2018, during which the S&P 500 Index experienced 23 trading days with moves of +/- 1% or more. The correction was bound to happen at some point and more volatility can be expected during the coming year. However, after all that noise, many segments of the stock market finished the quarter with relatively minor losses. For the quarter, small cap stocks performed better than large cap stocks and the growth style continued to prevail over the value style. The best performing sectors in the S&P 500 Index in Q1 included Technology (+3.5%) and Consumer Discretionary (+3.1%). The worst performing sectors during the quarter included Telecom (-7.5%), Consumer Staples (-7.1%) and Energy (-5.9%).
Non-U.S. developed markets stocks also retreated in Q1, but emerging markets generated small positive returns. For the quarter, the best performing countries included Brazil (+12.5%), Russia (+9.4%), and China (+1.8%). Countries that did not fare as well included India (-7.0%), the U.K. (-3.9%), and some Eurozone countries like Germany (-3.5%). The U.S. Dollar again fell relative to most other currencies, improving returns for U.S. investors in international stocks.
The fixed income markets also produced negative total returns, as investors have become fearful of inflation and future interest rate hikes. Cash (money market funds) yields are on the rise, along with Fed Funds rate hikes.
Hedging strategies generally delivered small, but positive, returns in the first quarter, with the HFRI Composite earning +0.6%.
Here are the returns for select market indices for Q1 2018 (as stated in US Dollars):
Responsible Investing Corner
According to the Global Sustainable Investment Alliance (GSIA), global sustainable assets under management reached $22.89 trillion at the start of 2016, a 25% increase from 2014. Europe accounts for over half of these assets (53%) while the United States accounts for 38% and demand continues to rise. The fastest growing region is Japan, followed by Australia/New Zealand. As opposed to the old version of socially responsible investing, which consisted primarily of negative screening, Environmental, Social and Governance (ESG) integration leads the way in the United States. Japan’s primary sustainable investment strategy is corporate engagement and shareholder advocacy. The fastest growing strategy (although small in absolute dollar terms) is impact/community investing. Pension funds often comprise the largest percentage of institutional sustainable investments, recognizing the long-term fiduciary responsibility. The rising interest in green bonds has shifted sustainable asset allocations in favor of fixed income investments.2
This and That
Here are some more fun facts from the 2017 Edition of The Economist Pocket World in Figures:
The U.S. has won more total medals (2,396) and more gold medals (971) in the Summer Olympics (1896-2012) than any other country. Russia is second (1,122 total medals), but also leads the world in anti-doping rule violations. Norway leads the way in the Winter Olympics (1924-2014) with 329 total medals, and the U.S. claims second place with 281 medals.
The Czech Republic leads the world in beer drinkers, with 147 liters per person of retail sales in 2014. Germany stands in second place (114 liters/person) and the U.S. ranks 17th on the list.
France is the leader in the number of tourist arrivals, with over 83 million in 2014. The biggest tourist spenders are from China at nearly $165 million. The largest (by far) tourists receipts are collected in the United States at over $177 million.
The top five countries with the largest number of mobile phone subscriptions per 100 population are Macau, Hong Kong, Kuwait, Saudi Arabia and the United Arab Emirates.
The top five countries with the most internet users per 100 population are Iceland, Bermuda, Norway, Denmark and Andorra.
The world’s largest exporters of goods, services and income are the Euro area (over 16% of total world exports), the U.S., China, Germany, and Japan.
In keeping with this letter’s original theme of adaptation, here is this quarter’s closing quote, from John Wooden, the great basketball coach at UCLA from 1948-1975: “Things turn out best for the people who make the best of the way things turn out.”
Thank you for being part of the Falcons Rock Impact family…we are all helping to do our part to make the world a little better place!
Gregory D. Wait, President
Falcons Rock Impact Investments, LLC
1 “Demographic Changes, Financial Markets, and the Economy,” Arnott and Chaves, Analysts Journal, vol.68, no. 1 (January/February, 2012)
2 “Europe Accounts for Over Half of Global SRI Assets as Sustainable Investing Takes Off,” Forbes.com, March 27, 2017