Here we are, already approaching mid-year, and both the economy and the markets have once again confounded a majority of the forecasters. They were convinced that economic growth would be robust in 2014 and that interest rates would be headed higher, but after one of the worst winters in the last 50 years, the economy actually shrank 1% in the first quarter.
While most market forecasters warned investors to stay away from bonds because interest rates would surely rise, the opposite has occurred, as the rate on the 10-year Treasury note has fallen from approximately 3% to roughly 2.6%. Meanwhile, equities have held up pretty well in 2014, especially considering how well they performed the last two years. The economic forecasts are more split now, as some expect the economy will rebound from the tough winter and grow in excess of 3% for the rest of the year, while others expect continued weakness in the economy.
What Lies Ahead?
Five months is too short a period of time to be overly concerned about; our aim is always to help our clients build durable long-term investment programs. But these last few months are representative of the great debate over what may lie ahead through the end of the decade and beyond. Are we destined for a slow growth economy, where the long-term unemployed continue to be so discouraged they never look for work again? Or are we on the verge of an economic renaissance where we finally shift into a higher gear of economic activity, driven by innovation in technology and bioscience, and by an energy revolution (both traditional and alternative) where the United States becomes fully energy independent?
And will we solve some of our chronic problems with a failed education system, debt and deficits, tax and regulatory policy, and general uncertainty?
Will our economy and our next generation be able to compete globally for jobs and growth?
Looking Ahead to 2020: Innovation Will Drive the Economy
As we look ahead to what may be in store for society by the year 2020, the innovation pipeline provides reason for hope and excitement. One compelling example of the advances that are already starting to impact our daily lives is artificial intelligence; examples include virtual assistants such as Apple’s Siri and efforts led by Google to develop a driverless car. Wearable devices are just arriving, and are expected to produce $800 million in sales this year and $6 billion within four years. Within a few years, many of us may be wearing glasses that display directions; smart watches that display messages; chips implanted in the hand that contain medical, financial, and identification information; and conductive threads in our clothes that take the energy we produce as we move to power the other devices we are wearing.1
Advances in Bioscience
In bioscience, regenerative medicine, which holds the promise of regenerating damaged tissues and organs in the body and creating new tissues and organs in the lab, is already showing encouraging results. Last year, Japanese scientists successfully developed human mini-livers that could function as a natural liver in a mouse; a person with liver failure could be infused with these liver buds, and this treatment could become commonplace within the decade.2 People who have already had their noses removed because of skin cancer have been given replacement noses made by the regeneration of their own cartilage cells. Research work is being done on all organs, and breakthroughs are happening, including on the heart and brain tissues.3
Needless to say, the number of life-altering inventions and discoveries coming to market in the near future is extensive and dynamic. Our networked world allows for smart people with bold ideas to keep accelerating the pace of development and change. We used to think of the future in terms of how different life might be over the next 50-100 years, but the timeline of dramatic shifts in how we live and behave has been cut down, and just thinking about what changes we may see by the end of the decade is overwhelming.
Staying on the Cutting Edge
Businesses, both the producers and users of new technologies, have to be on constant guard for both the opportunities and threats that are in front of them. It seems that every week we hear of technology companies like Apple, Google, and Facebook buying small, new firms that have penetrated the marketplace with a product or service that is spreading like wildfire. This year, Facebook has purchased messaging firm WhatsApp and virtual reality firm Oculus; Google has acquired Nest Labs, a maker of smart thermostats, and DeepMind Technologies, a leader in artificial intelligence; and Apple just acquired Beats, a maker of headphones, to integrate smart technologies into the headphone market. The big guys are moving fast and paying very large sums to make sure they don’t quickly go from cutting edge to yesterday’s news.
How do investors go forward in this fast-paced world of innovation? We learned from the technology/Internet bubble of the late 90s that innovation alone in no way prevents recessions and bear markets. Boom and bust cycles may play out over shorter horizons than in the past, but do not expect that they have been forever repealed. Price and valuation still matter, but the ability to ride the growth of new ideas that turn into successful enterprises is the wonder of equity investing. Equity ownership is the pathway to wealth creation, but attempting to pick winners and losers is just too difficult; it will only get more difficult given the faster pace of change. That’s why diversification is such a gift.
We counsel most of you, our clients, whose investment horizons extend beyond a couple of years, to have broad, global equity exposure and to avoid outsized bets on particular industry sectors or specific companies. Our job is to determine just how much stock market exposure is appropriate given your spending needs and risk tolerance. Then the key is to stay disciplined through down markets knowing that invention and discovery will not stop because of an economic recession or a bear market; these will likely be key factors in driving renewed growth and the next bull market. The years leading up to 2020 promise to be big, exciting, and rewarding, but are also likely to be volatile. Buckle up…the ride could be worth it.