As we get into the summer months of 2022, investors are eager for any scrap of good news about the capital markets. Many of the successful investing strategies of the past few years have been dishing out punishment to investors this year so relentlessly that the headline writers in financial media may have finally run out of optimism. Most commentators don’t believe that the markets can hold onto the brief rallies we’ve seen every few days, and it looks like a deeper pessimism is starting to settle in.
So, investors naturally ask: What’s going to turn this market around? Has the dip been severe enough that it’s time to buy? Are we headed for a recession that will take the markets even lower?
The answers to these questions lie in an economic concept that doesn’t have a lot of friends lately: globalization. The interconnectedness of global economics has contributed mightily to this year’s downturn, and it may be about to come to the rescue.
Over the past forty years, globalization changed the economic landscape in profound ways. The U.S. lost industry after industry to countries with lower costs of production. Globalization adversely affected our ability to compete in textiles, furniture, electronics, and a host of other manufacturing industries. It resulted in lost jobs and a lower standard of living for many U.S. workers on the lower rungs of the economic ladder.
But it hasn’t been all bad. The modern world has come to rely on an expansive infrastructure that has delivered millions of shipping containers around the world in record time and at low cost for years. It has supplied necessary components to value-added manufacturing operations that still thrive in many developed economies. The reduced prices that resulted from the growth of this global supply chain helped usher in the age of consumption in this country, to the point that many Americans have to rent storage facilities just to hold all their “stuff.”
It also gave the U.S. the freedom to enact policies that would have previously been inflationary. Over the last three recessions, the Federal Government was able to employ unprecedented levels of monetary and fiscal stimulus that rescued markets. And inflation never really budged—until now. Some have predicted that the pandemic will end the age of globalization, but we don’t believe that. Instead, a new form of globalization is rapidly evolving, and we’re calling it Globalization 2.0. It promises to lower inflation and increase economic growth, and it’s the reason you should stick to your investment plan.
At this point in the market cycle, the pullback in the value of risky assets has been profound. Stock market investors who had grown accustomed to the big tech companies powering through any market condition are now watching a pullback that is reminiscent of the dot com collapse that savaged portfolios 22 years earlier. Some technology investors let their risk budgets get a little bit too big over the last few years, even though they promised themselves two decades ago, “never again.” But the rally lasted for too long, and it tempted many investors to load up on tech names at any price (or worse—crypto-currencies). At BIP Wealth we have always overweighted value stocks, which have fallen much less than growth stocks. But even with our extra exposure to those companies with steady earnings, and ones that are likely to do well when inflation rises, this is not what we would call a fun year.
Fixed income investors who took a chance on high yield or “junk” bond strategies may have lost years of returns in just a few months. At BIP Wealth, with our focus on shorter-term, investment grade fixed income, the pain has been less severe. But nearly all fixed income is down at mid-year due to rising rates that are being driven by rising inflation. And even investors sitting on cash must know that they are losing purchasing power when inflation is this high. It’s common knowledge that risky assets have lost investors lots of money, but safer assets have lost investors money as well.
We think a lot of the blame for high inflation goes to the Federal Reserve for not seeing what was happening, and we’ve called them out every quarter for two years. But things are far worse now than they might otherwise be because of China’s radical approach to dealing with the pandemic. So-called “zero tolerance” policies may have had their place with earlier variants of the disease, but the highly transmissible nature of the most recent variants suggests an inevitability that has many scientists and economists re-thinking what works best.
As China and other countries that offer lower labor costs grapple with what to do next, we are witnessing the emergence of a newer form of globalization. The stresses on the system over the past 30 months have forced company after company to make sure their supply chains are risk tested or battle hardened. Just-in-time inventory management can be risky, but now companies are working hard to ensure that they have multiple sources of their critical inputs to production. It’s no longer just “Plan A.” Now companies have a “Plan B, C, and D.”
As supply chains become healthy again, companies will finally be able to satisfy previously unmet demand for their products. And as China and other countries make the hard choices to bring their economies back to their full potential, we should expect to see increasing economic growth and lower inflation. Our own Federal Reserve may have finally decided to do its job and implement policies that promote price stability. But the relentless march of capitalism and the private sector’s embracing of Globalization 2.0 may give investors the rebound we’re all so anxious to see.
This is Eric Cramer, Chief Investment Officer for BIP Wealth.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 60% of the index is comprised of the U.S. stock market and 40% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The U.S. Fixed Income index is the Bloomberg U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Bloomberg U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested.