Dear Clients and Friends,
Happy New Year! Can I still say that, or are we too deep into January? Be that as it may, I wish you all the best for 2020. After having read a dozen or so investment outlook and year-in-review letters, I am feeling a bit reluctant to reflect at length on 2019 and to opine on what the year ahead might have in store for us. However, I hope to leave you with some entertaining, if not insightful tidbits.
What Did Not Happen In 2019
A recession did not happen. In the first 4-5 months of the year, all the talk in the financial press was about the upcoming recession. When was it going to hit? What would the stock market do? At the end of 2018, the market may have somewhat priced in recession risk and so essentially everyone was weighing in on a topic that investors were already pricing in; a textbook example of an exercise in futility. A recession could have happened, but when the threat did not appear imminent, markets rallied into the end of the year. Lessons learned? One never can tell.
IPOs did not drive up Bay Area real estate prices (nor did they outperform the market). The Case Shiller San Francisco Real Estate Index’s latest reading is down 0.43% year-over-year and it looks like the local housing market topped in September 2018. San Francisco proper was still up, San Jose was down, and the other areas of the Bay Area were a mixed bag, but overall a picture is emerging of a flat price trend, albeit at a very high price level.
2019 was not the hottest year on record. That might be good enough for climate change skeptics, but I don’t derive solace from it being the 2nd hottest year on record. We need only look at Australia, Brazil, and the western US to see what a drier and hotter climate has in store for us. It is sadly not about the future anymore. But I am not a pessimist. As with saving for retirement, more and sooner is better, but it is never too late to make a difference compared to the base case of doing nothing.
Perhaps unnoticed by the drumbeat of dire predictions and news of governments dragging their feet, there are some positive shifts at play. Electric cars might just disrupt the car industry, offshore wind is growing by leaps & bounds, the coal industry is dying, and some governments are making significant, enforceable climate commitments. Case in point, the Supreme Court of the Netherlands ordered the government to cut the nation’s greenhouse gas emissions by 25% from 1990 levels by the end of 2020. Similar suits are pending in Belgium, France, Ireland, Germany, New Zealand, Britain, Switzerland and Norway.
The trade war did not spiral out of control. Both China and the US got enough out of it to save face and probably not all that much will change. But at least we won’t be shooting ourselves in the foot and unnecessarily triggering a recession, as it stands today.
What Will Happen In 2020
Robots will not take over in 2020. I recently attended a book tour event with economist Robert Shiller, who was promoting his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The narrative that robotics and automation are going to push aside most gainfully employed humans is as old as time. Apparently, Aristotle thought that textile weaving faced imminent automation, string instruments would soon be able to play themselves, and before long the need for all types of skilled labor would decline precipitously. Twenty-three centuries later, textile manufacturing is indeed fairly automated, and my son has a self-playing piano, yet unemployment is at a record low. There will be jobs in the future, but they will be different than those of today. Nobody in 300 BC could conceive of a computer programmer employed to optimize apps for the cloud, yet here we are. This fear of automation, Shiller suggests, is driving our desire to buy tech stocks as a way of participating in the things that are threatening us. Think stocks that are high on AI, such as Nvidia, Facebook, Tesla. This fear-driven participation might underpin tech stocks for years to come, or investors could lose interest and kill the momentum, which one will it be?
The 20s will not be like the 10s. Ok, that is not really a 2020 prediction and we’ll have to let that one marinate for a decade, but I am predicting that US stocks will not match the returns of the 2010s, nor will they be the best performing asset class. I remember having a conversation with a colleague in 2009 about the outlook for US stocks. At the time, people were despondent, having just experienced a financial crisis and a “lost decade” for the stock market. He predicted that stocks would do great because they were coming off such a low base and investors were so pessimistic. He was right. The lesson I learned is that the future will not be like the past. That is not to say we are not going to get rewarded for investing in the 20s, but rather that success does not lie in buying what was the best portfolio for the 10s.
In 2020, green sectors will do well. I think I should hedge a little here, by extended the timeline of my prediction to the next decade. Recently, Larry Fink, CEO of BlackRock – which oversees $7 trillion in investor assets – announced in his annual letter to clients and reiterated in an interview with NPR’s Ari Shapiro that BlackRock will sell out of investments that present a high sustainability-related risk. BlackRock will exit all companies that get more than a quarter of their sales from thermal coal and will create investment tool and strategies to enable clients to divest from fossil fuels and manage climate risk. He doubled down, by saying that it is his belief that “a sustainable portfolio will outperform or, indeed, will maximize your profits over a long period of time.”
Mr. Fink came to this view through “the sum of all [his] conversations in every part of the world with [BlackRock’s] clients and witnessing their questions about this. And it really became very clear to [him] – as somebody who’d been in finance for…44 years…that we’re at a point now where more and more people believe in the science of climate change. More and more people are worried about their portfolios and how their portfolio is going to be performing over a 10-year horizon.”
I can’t think of a better and more hopeful validation of the approach we have been taking and will continue to take on behalf of our clients.
Kindly,
Jan Schalkwijk, CFA
JPS Global Investments
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