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The 'new normal' continued

Not long ago the phrase the ‘new normal’ entered into investment jargon.  While discussion mainly surrounded the immediate condition of the US economy and markets after the recovery had begun, a wider perspective also began to emerge.

Every time markets crash, commentators re-visit whether a ‘fundamental change’ is occurring, markets won’t do what they’ve always done; bounce back. For a number of reasons, this time around the concept of a genuine shift seemed to hold more weight.

If so, it could mean there is a strong argument for changing the way portfolios are managed with a swing towards ‘absolute returns’, a style that seeks to produce a return regardless of market conditions, and a swing away from ‘long funds’, where you hold shares ostensibly for the long term with the aim of catching rises in share market values. 

We think there is some merit to this and like to include a heavier weighting of absolute returns in our portfolios.  What concerns us is that the US may have had its big growth run. From the early 1900’s, as an establishing country to a world economic giant, during a period featuring groundbreaking technological leaps, like powered flight, and all fuelled on the back of cheap oil, which they no longer have. 

This being the case it seems unlikely to expect the sort of double-digit returns we have had in the past.  So, it could be that the US is now a fully mature economy, having saturated its ability to sell Cokes and burgers at home, may be entering a sideways pattern of boom and bust, which potentially reflects exactly what we have seen so far of the new millennia. 

However, what provides a boost to the current regime is that a great many US and global companies are getting much of their growth from China and emerging markets.  China now has more internet users and buys more new cars each year than the US.  It’s entirely possible then that as the US exports itself to the world, the trend may well continue.  But while the US sees this as simply expanding its boundaries, China is rapidly developing its own internal markets and is increasingly looking to support those.  How long before they want to trade their Ford’s for something made at home?

We will be watching and only time will tell how this plays out.  While China’s swelling economic tide lifts all boats and aids in the healing process of the last few years, it seems wrong to count on this effect lasting forever.