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FPM: Why investors should revisit their portfolios after the market’s latest inflection point

Updated: Sep 3, 2022

Inflection points usually portend a change in market leaders for an extended period of time, usually the better part of a decade

Before life changed
Times Square in February 2020, Pre-COVID19

May you live in interesting times. It’s difficult to know if this old saying is a blessing or a curse, but the current times are indeed interesting. Unprecedented is more like it, given the current COVID-19 global pandemic and the accompanying government response. We have never lived through this type of reduction in freedom to do business, travel or speak out in modern times. The magnitude of the monetary and fiscal responses by governments has never been hinted at, either, let alone experienced. Are these measures temporary or are they part of a global shift? How will these actions affect a family’s savings and investments? Where are the risks and potential opportunities? Good questions all.

Global markets fell precipitously during the March 2020 risk-off swoon, soon after COVID-19 first made its presence felt in the western world, with assets such as the U.S. dollar and treasury bonds rallying before governments imposed economic lockdowns. The coordinated global response — tidal-wave amounts of stimulus — overwhelmed markets and pushed them upwards for the remainder of the year. As a result, risk-off assets such as the greenback went into decline.

These market inflection points usually portend a change in market leaders for an extended period of time, usually the better part of a decade. For example, inflation soared when Richard Nixon took the United States off the gold standard in order to pay for the Vietnam war. Subsequently, commodities and precious metals outperformed stocks and bonds for most of the 1970s.

In the 1980s, government regulation was reduced after the election of Ronald Reagan, and newly appointed U.S. Federal Reserve chair Paul Volker raised short-term interest rates to help break runaway inflation. Both paved the way for stocks and bonds in the U.S. to outperform until early 2000, when the dotcom bubble burst.

China at that time was growing its urban population by developing hundreds of modern cities whose populations eventually exceeded one million people. Electricity generation plants, high-speed rail, subways, bridges, dams and highways were built at a blistering pace. Commodity markets soared along with the stock markets of Canada and Brazil as they sold their oil, gas, coal, copper, zinc, sugar, coffee, corn, soy and even gold to China. In general, the U.S. stock market underperformed during the first decade of the millennium. A global credit boom that was centered on U.S. residential housing exploded in 2008 to set off the Great Financial Crisis, causing a credit contraction not seen since the Great Depression.

More recently, the widespread utilization of the internet, Wi-Fi and increasing telecom speeds allowed social media giant Facebook Inc. to create a keystone position around the world. Apple Inc., by creating the first “smart” phone, became the premium and dominant global technology player after years of being just a niche provider of computers to artists and graphic designers. Inc. reinvented retail for the millennium by taking the 1893-founded Sears’ mail-order business model and replacing the paper catalogue with an online version. There are similar stories of the destruction of cable television by streaming.

But let’s get back to what’s happening today and the potential consequences. One thing to watch for is that value stocks should begin to perform better after posting dismal numbers since 2011. In general, value stocks such as banks have been lagging due to the negative interest rate environment globally, with North American banks doing slightly better than their European counterparts. There are also opportunities in commodities, which have likewise been weak, since the excess supplies created a decade ago, which caused mines and plants to shut down, have been used up. Gold and especially what is becoming digital gold, bitcoin, may continue to do well this decade.

Prudent investors should also be looking to Asia (India, China, Vietnam and South Korea), parts of Central Europe and possibly Latin America as geographical areas that will deliver the best opportunities in emerging markets. They have underperformed as of late, but were less affected by the COVID-19 pandemic and that combined with a younger demographic make them better positioned for economic growth in the coming years. Also in the decade ahead, we are likely to experience a weaker U.S. dollar, as its valuation reverts to the mean.

May you live in interesting times, indeed.


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