I’m not sure I buy all of his arguments, but Gordon raises some very interesting questions. One is the fact that most investors anchor their investment assumptions on the recent past. But if past growth was a function of one-off events that cannot be replicated, is this a reliable guide to the future?
While I agree that changing demographics and excessive debt will act as a drag on growth, I think the professor’s assumption that income growth goes to 0.5% or less for the vast majority of Americans is overly pessimistic. In addition, even in the 1970s — not our best period — productivity growth still averaged nearly 2%. While the iPhone may not be as useful as indoor plumbing, I still believe technology gains will produce productivity growth in the 1% to 2% range.
Given that we do expect US growth to be slower, although perhaps not as slow as Gordon suggests, here are some things for an investor to consider. In a slow growth world, financial markets are likely to be more volatile, real rates lower and US equity valuations lower. One place to be particularly careful is with US small caps. This is the market segment most sensitive to US growth. We would prefer mega cap stocks that, hopefully, are exposed to faster international growth. We’d also want to increase exposure to emerging markets.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
