Quarterly Q&A | Strategy Update

The New World Order

How This Decade’s Investment Landscape Will Differ from The Last

What do we mean by “The New World Order”

Investment trends often last for very long periods, since they are usually driven by longer-term economic themes such as international trade, extended periods of warfare, global government (fiscal) changes, or significant breakthroughs in disruptive technology. Since investment trends are often long-term in nature, their corresponding investment strategies can last years. However, as economics shift, so do investment opportunities. Astute investors are wise to adapt their investment strategies accordingly. The world has recently experienced two very specific and major shifts in the global economic landscape, each of which will have a profound effect on different investment trends and invite different investment strategies: a global realignment of government policy and the acceleration of artificial intelligence (“AI”).

The New World Order – A realignment of global government policy

Over the past few decades, the US has been a big proponent of global free trade, relaxed immigration policy, and government spending that far exceeded revenue. These policies, in conjunction with a period of historically low interest rates and the accelerated growth of the largest technology businesses in world – commonly referred to as ‘the Magnificent 7” – directly resulted in the US economy’s global dominance, growth, and stock market returns. So much so that as of 2024, the US economy and market were deemed as the most “exceptional” in the world.

There is little question that US economic policy has taken a vastly different direction since the new administration took office early this year. These new policies are a significant departure from those of the previous administration and have set off a global chain reaction of foreign government economic policy changes – a new world order, if you will.  Here are some of the most important US economic policy changes in terms of investment themes:

• Move toward protectionist trade
• Tighter immigration control
• Fiscal spending restraint 

As investors, we need to be conscious of how the US policy changes highlighted above will change the economic landscape and financial market returns – they are likely to mute overall domestic growth. US companies – most of which are global – suffer from protectionist trade. Higher labor costs hurt corporate profit margins, and a reduction in government spending directly and negatively impacts US business. Left in place we would suggest that US economic growth will slow and lose its envied “exceptional” status. As a counterbalance to these headwinds, US policy will hopefully make some strides in reducing debt – long overdue and necessary to avoid an eventual credit downgrade. The US will also benefit from the policy of deregulation. Lastly and importantly, AI is largely US-led for the time being, which should serve as support in an otherwise growth dampening policy shift.

What does this mean for US financial markets and our strategy?

We can already see how these significant US policy changes are affecting domestic financial markets. As of this writing, the S&P 500 has advanced approximately 14% YTD, however most of that return can be attributed to just eight stocks that represent more than 40% of the index. Those eight stocks are, in one way or the other, linked to the very real growth in AI. As for the other 492 stocks, most are flat on the year or have lost value. We believe the US stock market has correctly identified with the administration’s policy shifts – and may continue to do so for quite some time. If we break down other industries within the 492 stocks that are in the “green” this year, it is those helping expand the electrical grid (an AI data center “play”) and financial stocks (beneficiaries of deregulation policies). Equity markets are clever and discount the future of policy – we would give the US market an “A+” in terms of this discount mechanism. As you know, most of your domestic stock exposure is focused on these more profitable sectors and themes.

Foreign economic policies shift in reaction to US

These US economic policy shifts have caused a chain reaction in overseas economic policy – in terms of interest rates, trade, and, most importantly, fiscal monetary policy. After decades of balanced income and spending, foreign governments have unleashed an appetite for fiscal spending, largely due to the massive withdrawal of US funding. The new paradigm of foreign economic policy is:

• On a fiscal spending spree 
• Unchanged on immigration policy 
• On a campaign of lower interest rates

Each of these policies is accretive to improved economic growth, and it is already apparent in the performance of foreign stock markets. As of this writing, foreign stocks have advanced 26% YTD versus 14% for the S&P 500. As you know, we are a global manager and have dedicated nearly 40% of your portfolio to equities domiciled outside the US. Once again, the stock market has very quickly identified where future opportunity lies. Given that foreign stocks have been neglected for decades (they trade at steep discounts to US stocks) this trend of outperformance may last for quite some time – years, not months. As investor concern rises about the elevation of US stock prices, our foreign exposure in great quality companies such as Siemens, HSBC, and Allianz, trading at very low price versus earnings multiples, provides a safer shelter of diversification.

Is the AI bubble about to “pop?”

We believe the AI bubble is still healthy and doesn’t risk popping any time soon. The tremendous rise in AI stock prices is a reflection of what is happening during this technological revolution. Major tech breakthroughs create soaring stock prices based on soaring earnings, and, so far, we have witnessed both. There will be a point where investors have bid stocks prices up to unsustainable levels and the bubble will “pop.” The declines will be ugly! However, we are not there yet, and we would argue that we are not even close. Here are some “bubble popping” metrics which we track:

• Price earnings ratios vs. earnings growth rates – still attractive
• Investor sentiment – only mildly bullish
• Investor cash and leverage  – healthy 
• Circular financing – trending upward but nowhere near “popping levels”

We are still in the early innings of the AI tech-led bull market, however, keep in mind that there will be normal corrections ahead (index declines of 8-12%) and they may feel a bit startling since we haven’t had any recently!

How can we protect ourselves if the bubble “pops” unexpectedly?

Markets can always shift abruptly to the downside based on unforeseen risks or events – including the eventual “popping” of the AI bull market bubble. Try as we may to foresee trouble that lies ahead, we know this can at times be less than perfect, which is why we always incorporate our Active Risk Management process. This process allows us the flexibility to quickly reduce your allocation to stocks, remain in defensive sectors, and employ very carefully placed stop loss orders to maintain our discipline of mitigating catastrophic losses. Your assets are important to your lifestyle and your future, and our Active Risk Management, along with our oversight, is intended to keep them safe.

If you have any questions about your portfolio or have experienced a significant change in your finances, please let us know.

Thank you from all of us for your continued vote of confidence in our work – we wish you a very Happy Thanksgiving!

If you have a family member, friend, or colleague who could benefit from our work or a no-cost wealth management and portfolio review, please let us know, and please feel free to share this Strategy Update.

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