I can’t remember where and when I read it, but one market observation that has stuck with me is that “markets often go in the direction that causes the most amount of ‘pain’ to the most amount of people”.
This comment seems very apt right now, given how many investors view recent market strength with incredulity. How can the market recover against such an uncertain background? Well, perhaps part of the answer lies in the fact that most investors are not positioned for a bull market.
We look at a few inputs to get a sense of this and it is fair to say there remains a very high degree of scepticism amongst investors today, suggesting the recent moves higher are not very welcome. Odd that it may seem, the fact that most investors seem positioned for renewed weakness supports the argument that the market will continue to climb the proverbial ‘wall of worry’, causing ‘pain’ for those waiting for weakness. As Sir John Templeton said, “Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria”.
Of course, sustainable bull markets need more than investor scepticism to fuel further gains. Ultimately, we need to see earnings growth and as long-term investors we need to ask where this growth will come from.
In my last note, I talked about how we are living through a period of remarkable technological change and how the drivers and beneficiaries of this trend were outperforming the rest of the market.
As regular readers know, we have been thinking about how the broader economy could leverage technology to boost productivity for some time and we have leaned very heavily on the work of Professor Carlota Perez, to help us understand the very nature of technological revolution.
To recap briefly on Perez’s framework, she describes three stages of technological revolution: the installation period, the turning point and the deployment period.
Looking at the current revolution, the installation period started with the ICT revolution in the 1970s. This period arguably ended with the dot-com bubble of the late 1990s and ever since we have been lingering in a very long turning point period, characterised by economic and political uncertainty.
Despite the technological progress we have made, the economy has not been able to transition to the deployment period, when the innovations of the installation period get deployed for greater society, heralding increased productivity and growth.
What I find so interesting now are the historical analogies with the last great deployment period, when the US economy rose to ascendancy during the post-World War II golden age.
During this revolution, the great innovations were the advances of the early 1900s, including electrification, the automobile and mass production. However, it was only after a period of extraordinary loss and existential crisis that these innovations were deployed for greater society, with government playing a very significant role in stimulating investment.
Whilst clearly not as bleak as the 1930s, we are no doubt living through a fraught period in history right now.
However, we are also seeing a growing consensus about the positive role government can play. We are seeing push-back on the drive for efficiency and profit maximisation at all costs.
For all the immense challenges that have come with Covid-19, the response from governments and central banks has been remarkable. Arguably the role of government has been galvanised by this crisis and policies such as Universal Basic Income are no longer seen as extreme.
Furthermore, whilst there is much to worry about the deteriorating relationship between US and China, one of the consequences may be increased and competitive government investment in technology. For example, last week it was reported that, following a bipartisan initiative, the US National Science Foundation is set to receive an additional $100 billion over the next five years.
In writing this piece, I am aware that this may all come across as naively optimistic or hopeful. However, I am intrigued by the remarkable performance of leading technological platform businesses through this crisis and I believe there is information in their resilience.
I am also intrigued by historical analogies with the 1930/40s and I find the prospect of new golden age, catalysed by greater government investment, stimulus and direction, tantalising. It also seems contrarian to be optimistic right now.
Our focus will always be on protecting our clients’ irreplaceable capital and a critical part of this role is focussing on what can go wrong. However, we believe as long-term investors, we must also ask what can go right and position accordingly.
As always, please do not hesitate to contact us to discuss our views further.
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