Erik Weisman, investment officer and portfolio manager at
In recent recessions in the 1970s and 1980s, when the market has dropped sharply it has subsequently risen sharply, but not this time. “We’re likely only in the middle of a financial crisis that will be long lasting,” he said at the lunch event, “Stops, Starts and Stalls: Making Sense of the Recovery,” in New York Tuesday.
While past economic recoveries have seen growth of 6% to 8%, creating demand and leading to a hiring spree by companies, this one is pulling a relatively sedate 3%. “Assets will do okay, but it will affect public policy,” Weisman said. “However you slice it, we’re got to do a better job of creating labor,” something he concedes is “devilishly difficult” in an environment of only 3% growth.
Companies’ hoarding of cash rather than reinvesting it certainly isn’t helping speed things up, added James Swanson, MFS’s chief investment strategist. It’s understandable—during the crash companies’ access to capital was abruptly cut off; their response is to prevent that from happening again by having the cash to self-finance—“but they’re not banks and stockpiling 12% of their assets is doing nothing for them,” Swanson said.
Another problem for the U.S. economy, although not so much U.S. investors, is that companies are actually making money, 7% in revenues, which is double current gross domestic production (GDP), but their operations in overseas markets are generating the growth, and now account for 40% of revenues. Added to that the cheap labor available in emerging markets, and it’s no wonder U.S. companies with international business aspirations are turning their backs on the sluggish economy—and the bloated ranks of the unemployed—back home. “American workers want $30 per hour, come in with hangovers and want their mothers’ birthdays off,” Swanson said. “Chinese workers will do it for $2 per day, which is why getting back to 5% unemployment [in the U.S.] is going to be a problem.”
On the plus side, while with discretionary spending down the service economy is shot, technology “is now what America makes, and the industry has a call on Chinese and Indian youth,” Swanson said. But don’t put all your eggs in one basket, added Joseph Flaherty, director of quantitative research at MFS. “Whether it’s absolute or relative, the markets take a random walk,” he said. “Even cash, the ‘risk-free asset,’ is subject to relative volatility.”
The answer? “Diversified portfolios’ average return is a little above the median and risk is at the lower end of the spectrum, so you get better risk-adjusted returns over the long run,” Flaherty advised, adding that investors need to rebalance regularly in order to maximize their long-term returns. “Benign neglect is extremely dangerous,” he said. “You get better risk-adjusted performance through regular rebalancing.”
Howard J. Stock writes for Bank Investment Consultant
