GW&K Investment Review 3Q 2023
In many ways, the world is still trying to find its footing amid the aftershocks of Covid. With the crisis ushering in everything from economic shutdowns to consumption explosions, from fiscal profligacy to monetary restraint, is it any wonder our social norms have struggled to keep up with all the change?
The good news is that we’ve gone through this process numerous times over the years, recalibrating the world’s economic systems in the face of geopolitical upheaval. The most glaring example, of course, was the sequence introduced by World War II, when we had an explosion of production and economic activity to meet the war effort, followed by a post-war recession, followed in turn by the lackluster years of the 1950s. President Eisenhower governed through those final eight years of healing, warning us to be careful of interventionism and the subtle pressures of the military establishment. This policy changed dramatically when a youthful, energetic, articulate new president followed Eisenhower into office.
In the decades that followed, we navigated the events of Vietnam and 9/11, which also challenged our nation’s confidence and policies. Political choices and economic realities evolved side by side as we entered wars on foreign soil, expending national treasure and human life. Whether these military engagements had any long-term success is for historians to debate, but the domestic resources necessary to engage in these wars had a profound effect on our economy.
The common thread through all these adversities was the need for business to adapt to the new world order. The beauty of capitalism is that it cannot look in the rearview mirror and bemoan what happened. It must look forward and take advantage of the new environment. This is where we’re at in today’s cycle, bringing us to the forefront of renewal, creativity, and implementation. Whether it be artificial intelligence, bio-medical technology, or the fast-moving shift in energy sources, companies must adapt to the new norm. It will be a slow process. The drive to be less dependent on Chinese factories, to develop competing facilities in Mexico, India, and Vietnam, or to bring production back to the US is very complicated. The old “just-in-time delivery” reduction of inventory has become a victim of the new world economic model.
The geopolitical backdrop, particularly the war in Ukraine and the tensions between China and the US, promises to muddy the water for businesses, making opportunities more difficult to identify and decisions harder to implement. Given this new reality, it is rational to sit on the sidelines, collect 5% interest on money market funds and wait for these issues to be resolved. Nevertheless, as we reflect on the ground-shaking events alluded to above, knowing that society always finds its way back should provide us hope. Behavioral changes move slowly, with many fits and starts. Economies are not so different from people, able to move on only after a period of mourning, anger, and frustration.
This time will be no different. The extremes of the pandemic have passed. The medical industry has come to our rescue. Once again, we face the world expecting setbacks, a natural part of the healing process. I believe we will muddle through the next few years, and I see the 2028 election cycle as a new beginning, like Kennedy succeeding Eisenhower. It will take youth, faith, and the ability to articulate the future to move forward as a country in a united way. Until then, the fracturing that now exists will continue to be an anchor on realizing the full power of the US system.
So, as we live through the next few years and wait for calmer waters, we still need to invest in the future. Short-term interest rates will be peaking in the next few quarters as inflation continues to slow. Following first a stabilization and then a reduction of those short rates, a decline of long-term rates will soon follow. We can quibble about the exact timing, but for the economy to have any semblance of health, long-term rates must decline, and they will.
Those who find comfort in money market funds will miss either the next bull market in stocks or the opportunity to lock in the attractive rates of longer-term bonds. A bell doesn’t ring to signal when you should commit to long-term assets. Remember that short-term interest rates are short term and only short term. That is not investing, it is sitting around waiting to invest, better known as market timing. While I always encourage portfolio diversification as a key to success, I want to add a new discipline —patience —which will also be a critical component of this next investment period.
As we wind through this current period of enormous change, rise above the problems-of-the-day and believe that our country will find new ways to grow and flourish. It’s not obvious how it will happen this time around, but a patient approach, a healthy perspective, and a diversified portfolio will harness the positive energy of this ever evolving and growing world economy. Stay well.
Harold G. Kotler, CFA
Founder-Chairman, Chief Investment Officer