The stock market has literally gone nowhere for about two years now. And for two years pundits and experts alike have tried to offer explanations and predictions on when the market will break out from its' doldrums. The prognosis is mixed, with what seems like an equal split between whether that breakout will be to the upside or the downside.
Stories abound about the crisis of the day: from ISIS to Brexit; the dollar is up, the dollar is down; China's economy is crashing, China's economy is turning around; the Fed will raise interest rates, the Fed will lower interest rates…
But long-term market trends are more likely the result of long-term economic trends. The really big trends. The kind that tweaking monetary policy or changing Presidents won't really impact.
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What we know is that the developed world's population is: 1) growing at one of the slowest paces in history and 2) aging. The ramification is huge. Older people buy less stuff. Smaller and older populations mean even less stuff gets bought. The manufacturing of stuff is the key driver to wealth creation through wages and consumption. Growing wealth means higher tax revenue without increasing tax rates. Conversely without the growth of stuff, wealth is stagnant and government deficits rise to meet increasing demands from an aging population and mandatory spending increases.
Below is a graph from the May Cass Freight Index Report. The top line is expenditures on freight shipments, which includes price and volume. Actual shipments is below, shown with the blue line.
The takeaway: Shipments have been flat since the beginning of 2012. Currently we are at a three-year low for comparable monthly shipments. Things aren't improving.
In the U.S., we are somewhat buoyed by a stronger, larger and growing service sector. But jobs and wages still require a vibrant manufacturing base for a broad-based economic revival.
The point is this: Until global demand for goods and services turns up, global economies will struggle, deficits will continue to rise and interest rates will remain low. You can knock yourself out following all the economic minutiae and various guesses as to what will affect what. But the simpler alternative is to follow how much product is being moved around the globe. When shipments and transportation indexes hit new highs, I'll be comfortable that any stock rally will be real.
Is There Hope for Change?
Demographically we could be in the economic doldrums for another decade or more, which could mean mediocrity for broad based indexes, such as those represented by the MSCI global indexes.
If not a purely stock picker's market, this could most likely be a sector picker's market. One way to possibly profit is to look at big trends, such as demographics, that are too big to be affected by the turmoil of the day. For example, when I hear people talk about the upcoming election and how they are afraid to invest, I simply ask, "Is anyone really going to stop buying drugs (legal), diapers or toilet paper, whether Trump or Clinton is elected?" So if you're really worried, buy Johnson & Johnson (symbol JNJ), Procter & Gamble Co. (PG) and Walgreen's (WBA). And collect your dividends while you wait for better times.
A new, bigger and hopefully a "not screw up-able" trend is the Internet of things. Some futurists predict everyone will own seven devices that will be connected to the Internet by 2020, in addition to their computer and smart phone. At first, I thought this seemed high. But let's count. In addition to my desktop and phone (I don't have a tablet device), I have two Amazon Kindles. My Garmin fitness/golf watch makes five. Sixth, there's my Amazon Firestick for TV. The other TV is a "smart TV," so that's seven. Two EcoBee Internet-connected thermostats bring me to eight and nine. Then there's my Fitbit scale.
Looks like I'm four years early.
And look at what's also available or coming soon: Samsung is advertising a refrigerator that connects to the Internet to inform you when you need things such as milk or when your broccoli is spoiling. Home security systems, better smart watches, the rest of your kitchen appliances – stoves will be capable of pre-programming to bake the perfect loaf of bread (no more timers or temperature settings).
And that is just in the home. Cars will all be linked (controlled) over the Internet. Every step of manufacturing will be monitored and controlled. Lawyers, medical doctors, virtually all professionals will have more and more data made available and analyzed by artificial intelligence. And all of the above produces data that needs a place to be uploaded and safely stored in the cloud.
By some estimates, this will all add up to a $6 trillion market over the next five years. Will a Brexit stop this trend? A rising (or falling) Yuan? Clinton or Trump? No. This is a trend in its infancy that will play out over the next decade.
Bottom Line
Sometimes we make investing too hard. The global economy and, by extension, stock markets certainly are sailing into a headwind. But that doesn't mean that industries and companies won't change. And where there is change there is opportunity. Global chaos doesn't mean not investing, or for heaven's sake, putting all your money into gold bars. Invest in consumer staple producers such as P&G and JNJ, and collect your dividends. And for growth, invest in the inevitable. Ignore the day-to-day analysis, and follow the big trends. Short-term volatility will make way for a long-term trend when we see the world making, shipping and selling more stuff.
Bill DeShurko started in the financial services industry in 1987. He is the owner of 401 Advisor, LLC, a Registered Investment Advisor.
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