From a thundercloud, the spinning column of air forms.
Between ground level and the sky, a tornado emerges. Twisting and churning the air, the tornado stomps out its path. You can see dirt and debris fly as it traverses the land, but the extent of its force is rarely understood in real-time.
For those powerful twisters, it’s only after the fact—hours, days, sometimes weeks later—that we begin to understand its lasting effects.
Long-term market drivers that investors face act similarly.
We may see market drivers from a distance. Much like the debris and dirt spun about from a tornado. But we can’t visualize what’s inside that twister. We can’t see the humidity and atmospheric instability inside it. But we know it’s there. Meanwhile, the twister—or market—leaves its impact.
All we can do is watch the interplay between different factors play out, and then after we can begin to predict the likely impacts on investment results. Let’s look at four main factors that’ll likely affect long-term market outcomes for your clients.
Market Driver #1: Debt
When COVID-19 rocked the globe, governments everywhere dedicated never-before-seen types of fiscal stimulus to help battle the destructive influences societal lockdowns had on the global economy. Because of this, most nations aren’t in a comfortable spot.
Limited headroom for debt issuance is a common theme, with many countries seeing downgrades in their sovereign debt ratings. The US is no different. Now, one way to try and reconcile debt is through higher refinancing costs. After the years the world has just been through, the problem is that it’s impalpable for most governments.
Many governments now want to control their debt rather than focus on economic growth. It’s still too early to see how this will play out in the coming years, but for the most part, it seems governments want to try and be part of the solution as countries vie for a post-COVID world.
Both at home and abroad, that could mean a rise of more European-like social market economies compared to more orthodox, classical economies. This is something to keep an eye on for client portfolios.
Market Driver #2: Geopolitics
Growing tensions with China. Russian threats. A rise in populism. These factors and more can drive geopolitical risk in markets for the foreseeable future. Regarding China particularly, the markets will see a battleground between the US and China in the tech sector as the two duke it out in a battle for worldly dominance.
By 2030, it’s estimated that China may have a larger GDP than the US and take the title as the world’s biggest economy. This prospect could have significant implications for the relationship between the US and China, with particular interest paid to multi-lateral agreements and institutional prowess. Due to increased governmental involvement and national security interests between the two powers, there could also be impacts on metals, ores, fossil fuels, green energy, and more.
Secondly, stagnation in wages and greater inequality in economies across the globe has led to the rise in populism in recent years—posing another potential market risk. With populism, globalization is often seen as the source of economic discomfort due to imports, immigration, and outsourcing.
And politically speaking, populists support protectionism policies that can affect trade agreements and much more. Adoption of these policies will create market instability to the globalism-first norm we’ve held for decades. Countries will ponder their national interests first and renegotiate alliances to become more self-dependent.
Market Driver #3: Technology
Advancements, automation, and Zoom video. Those are what companies leaned on and valued throughout the pandemic, and there’s no reason to think it’ll slow once we’re in post-pandemic times. There will continue to be investment booms in the tech sector, and it’ll be interesting to see where the focus shifts throughout the next decade.
Be on the lookout for widespread adoption of technologies like blockchain, 5G, quantum computing, and artificial intelligence (AI) in the public and private sectors. These tech innovations have made wealthy countries starry-eyed as they look to boost their national security and economies through innovation. Labor-intensive and lower-skilled jobs could diminish with the disruption of increased automation—which may sound like a bad deal for would-be workers.
But the automation driver will improve business models and bottom lines across just about every industry. However, the investment requirements needed for automation systems may lead to a longer lead time before the productivity boost is realized.
As of now, automation will affect more developed economies that have better policy environments and greater strengths in their institutions. This will likely exasperate the gulf between more and less developed nations. Lower-income countries may need heavy reliance on organizations like the IFC, UN, or World Bank to have a shot at keeping up.
Automation and AI will revolutionize job market structures and how people view employment in advanced economies in service sectors. Keep a pulse on technology trends and breakthroughs as innovations drive the markets.
Market Driver #4: Supply & Demand
Although the outlook seems like this may be a shorter play than the previous drivers, COVID-19 taught us that supply and demand aren’t guaranteed, and its effects can extend across almost all industries.
Supply and demand can create a dynamic in prices, whether for products, services, currencies, or other investments. So when production costs increase because of low supply or an increase in demand, you typically get bad news. We’re seeing this currently with the staggeringly high rise in inflation. There are real supply chain issues that have yet to be resolved.
While we haven’t quite seen the long-term effects of supply chain issues and the outcomes of an unbalanced supply and demand, we’re certainly feeling them now. And with inflation likely lasting for a while, this is critically important to investors for years.
Long-Term Market Drivers & The Future
These market drivers may create unique circumstances and likely offer investors skewed risk and reward scenarios in the coming years.
Interest rates will be another factor. If countries maintain lower interest rates for more extended periods, it’ll likely play a role in the automation investment boom and create an era of increased and sustainable returns. Although this will vary from government to government depending on their actions, each country will need to recognize that next-generation outcomes for their citizens will come from policies created in the next five years.
Although market drivers aren’t limited to these four areas, it’s important for clients to be aware of mechanisms like these that move and impact their investment outcomes. These long-term market drivers will likely affect both the intensity and direction of investment results, so it’d be wise to keep them in mind as you analyze and maintain your client portfolios.
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For Financial Professional Use Only
The content within this post is for educational purposes only and does not represent legal, tax or investment advice. Customers should consult a legal or tax professional regarding their own situation. This presentation is not an offer to purchase, sell, replace, or exchange any financial product. Insurance products and any related guarantees, features and/or benefits are backed by the claims paying ability of an insurance company. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results.
Mitchell, Cory. “4 Factors That Shape Market Trends.” Investopedia. August 17, 2021. Accessed December 4, 2021.
Catechis, Kim. “Deep Water Waves.” Franklin Templeton Investment Institute. Accessed December 4, 2021.