US economy is slowly but surely showing signs of deterioration in economic growth. Earlier this week, Purchasing Managers’ Index (PMI) came in at 51.2, the weakest level since January. Forward looking indicators are projecting economic contraction in the third quarter. Both manufacturing and services indexes are showing declines suggesting that businesses are concerned about rising costs and drop in demand. Elsewhere, Eurozone reported that its economic growth deteriorated to a 16-month low in June adding to the prospect of a global slowdown. One upside from the weaker demand is that prices will drop signaling a reduction in inflation. The improvement in inflation expectations drove a recovery in the stock market on Friday wrapping a week that followed the worst week since the start of the pandemic.
The big question is what will the stock market look like in the coming months given the slowdown and which investments make sense for investors?
Future Wealth’s View
The important task for all investors is to learn from lessons in the past and recognize that the world can change in dramatic ways. A look at the 20 largest companies in the world in terms of market cap points to a majority (13 of 20) of US companies with the likes of Apple, Microsoft, Amazon, Google, Tesla etc. dominating the list. But a look at the same list from 1989, one would find 13 of the 20 companies on the list were Japanese. Why is this significant? Because none of those Japanese companies are on the list today and none of the US companies on the list today made the list in 1989.
While investing in US companies is no doubt compelling for investors, under the current circumstances, it is important to become a deep value investor and a global investor. Transitioning to deep value means taking a hard look at fundamentals of individual US businesses and not randomly investing in companies or the S&P 500 index. Global investing is even more compelling given that valuations are well below US valuations and many countries will likely grow faster than US in the decades ahead.
While we ponder how to transition our investment approaches for the future, the Supreme Court eliminated the constitutional right to abortion and relaxed rules on gun ownership marking a giant leap to the right on two of the divisive issues facing an already polarized nation. Only time will tell what the impact of turning back the clock on these issues will have on our own lives and our children’s future.
While it is hard to be positive in a crisis that faces us in more ways than one, we all need to anchor off an uniquely prosperous and peaceful period in human history. In difficult times, our emotional brain trumps the rational brain and the more stock prices fall, the more afraid we become. But the future is very unlikely to look like the past and therein lies the opportunity for all investors and mankind alike.