7 Trends That Make Me Feel Optimistic About The Markets
By Christopher R. English, President of Lumen Capital Management, LLC
A Brief Review: Consolidating Gains
The good news for markets was they had a running start out of the gates as the year began and recovered nearly all of last year’s losses by the end of April. But all good things must come to an end. That rapid pace slowed down in May and stocks have struggled this month. Looking at where we’ve been, it’s not out of the question for stocks to grow an additional 3-6% on a total return basis from where we’re currently trading by the end of the year, meaning we could potentially see 8-10% growth when looking out over the next 12 months. That being said, I’ve been talking about the potential for stocks to reset and the likelihood of increased volatility for a while now. I think a 5-10% pullback is possible between now and the fall. But, what is possible and what will occur are two separate things. If that pullback were to occur, and based on what we know today, it would likely provide an opportunity for better entry levels for me to establish new positions in areas I find attractive or add to those ETFs I already hold for you.
Regardless of what this short-term slump might look like, I am guardedly optimistic about many of the trends I see. My view is that we’ve spent the last 18 months or so consolidating gains from the 2016-2017 advance, and once we finish this period, we’ll likely move higher in the next phase of this bull market. This is not just wishful thinking. Here’s an overview of seven of the most important concepts or trends as I see it that give me this long-term optimism.
We Aren’t Living In The Post-World War II Economy
We are living in a fascinating time, where our world is becoming more technologically advanced and decentralized than ever. As such, I believe that most current statistics don’t truly capture the effects of what is happening, and therefore economic growth is underreported.
This hidden economy supports stocks on declines and is one of the reasons I believe economists have been underestimating output. Many data points and statistics are designed to capture economic activity from when the U.S. was more industrial based. But today, many people work in what’s known as the “gig economy,” a general workforce environment where individuals work under short-term contracts, work as independent contractors, or are temporarily employed.
We have yet to capture the economic outputs of these new forms of work, which leads to inaccurate growth measurements. For example, how do we measure the person who may have an actual job but then drives for a ride share company on the weekends? How do we measure somebody who buys and sells items online or the person who makes and sells jewelry in their spare time? Since we don’t know how to measure this new economy, I think there’s more money sloshing through the system than we think, leading to wider support under stocks than is generally assumed. This investment view largely shapes our investments in major market indices via ETFs and ETFs that are focused on total return.
Changes In The World Order
This is the least optimistic change that I see. We need to understand that some of the strategic advantages the United States has enjoyed since the end of the Cold War are under pressure. China will be a strategic competitor going forward, and Russia, Iran, Turkey, and North Korea will also wrestle with Western interests. Europe has yet to define what she will look like in the 21st century, while Asian countries, such as Japan and South Korea, must also grapple with China’s rise. If we want to take advantage of this environment, we would invest in aerospace and defense ETFs as well as technology and industrial ETFs. I believe certain international investments are also poised to take advantage of this long term as well.
Generational Changes
Millennials and Generation Z are now becoming the predominant American generations, impacting culture, policy, and decisions. The Millennial generation, those born between 1982 and the late 1990s, is over 75 million strong and are now America’s largest generation, eclipsing even the postwar Baby Boomers. Millennials make up nearly a quarter of the total U.S. population, 30 percent of the voting age population, and almost two-fifths of the working age population. (1)
Behind them comes Generation Z, which is predicted to make up 32% of the population this year. (2) These cadres are more diverse, more socially liberal, and better educated than the previous generations and much more comfortable with technology and change. What also needs to be understood is the likely coming baby boom as these generations settle down and start families. How do we invest in light of these shifts? I try to take advantage of this through major market indices, particularly the more tech-oriented Nasdaq, technology, and financial ETFs. In addition, these generations herald the coming social acceptance of marijuana, so we have been actively researching ways to invest in this trend.
Exponential Advances In Knowledge Akin To Moore’s Law
This is one of my guiding core principals when thinking about economic growth and thus market returns. One of my core beliefs is that advances in communication and data storage mean that knowledge is advancing at a geometric pace akin to Moore’s Law, which says the number of transistors on a microchip doubles about every two years. While the sum of all human knowledge may not be doubling that quickly, its advance is rapid and exponential. This means, for example, that an idea generated in Germany can be instantly transmitted and stored around the globe. This has huge implications for almost every scientific, technical, and social discipline. Advances in knowledge have historically meant advances in economic growth. This can be nothing but beneficial for markets in the long run and informs my outlook on nearly every investment I make on your behalf.
Technological Advances Disrupting Traditional Industries
Along with the advances of knowledge, technological discoveries and the miniaturization that has come along with it are disrupting many aspects of the economy. Two easy examples of this are e-delivery services and the societal revolutions caused by cell phones. The explosion in robotic and drone technology can also be seen as a beneficiary of both these trends. The same broad aspects of this idea for investing also apply to my views on the geometric explosion of knowledge.
Revolutions In Healthcare
Healthcare is one specific sector of the market poised to take advantage of the advances of technology and knowledge. The way to invest in this sector of the market is through healthcare ETFs as well as broader indices.
The Investment Revolution That Is ETFs
There is no better example of a disruptive technology than the rise of ETFs. Being able to invest, both tactically and strategically, in an investment vehicle that has low costs is extremely unlikely to trade to zero, can pay dividends, and that is tax efficient means that modern investment tools that were traditionally only used by large institutions are available to all. In fact, we at Lumen Capital Management, LLC have developed tools and strategies to take advantage of these investments. ETFs are a disruptive game-changer to the investment system, and I believe we are only about halfway through what this universe of unique investments will look like 5-10 years down the road.
Moving Forward
I hope this overview answers some of your questions and gives you a framework for understanding why I feel positive about where the markets are going. Stay tuned, because in the coming months we’ll try to discuss these factors in more detail. If you are concerned about or have questions regarding where our market sits today and how your portfolio is built to withstand the seasonal nature of the markets, please reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com.
About Chris
Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.
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posted by CR English at 11:41 AM
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