What Creepy-Crawlies Have in Common With the Economy
Fun fact: There are approximately 8,000 species of centipedes and none of them have exactly 100 legs. Most have somewhere between 15 and 177 pairs of legs. (Who knew?)
With all those legs, centipedes don’t need all of them to touch the ground at the same time in order to stand or walk. A few pairs of legs can be up in the air without a problem.
For the last few years, the U.S. economy has been a lot like a centipede walking over a bumpy surface. Some of the legs of this economy are gaining traction, but there also are some legs left up in the air. The economic legs on the ground seem to be rotating positions with the legs in the air. We are seeing a rotation in the areas of the economy that are sustaining our slow growth recovery.
One pair of “legs” gets the next pair moving
Early into our recovery from the Great Recession, the United States exhibited a weaker dollar as a result of lower interest rates caused by monetary stimulus. The combination of lower interest rates and a weak dollar began propelling the economy. That was our first pair of economic legs. That pair got the second pair moving: Corporate profits began to strengthen and the stock market began to recover. This created a wealth effect: As people’s investments began to increase in value, they felt better about the economy overall.
That general optimism propelled more economic growth. Those first two pairs of economic legs got our country moving again, albeit slowly.
The next legs of our economic recovery
However, legs invariably get tired. The first two pairs of U.S. economic legs (weak dollar/economic stimulus and increasing corporate profits/wealth effect) are now losing traction. The work of economic growth was passed to two new pairs of legs. As the stock market improved, both consumer confidence and employment returned to healthy levels. These two legs really worked in tandem, since consumers who are employed tend to exhibit greater confidence.
The final pair of legs now powering our economy are home prices and government spending. Home prices for most of the nation have recovered from their lows. Homes that were underwater or had negative equity are now above water again.
As for government spending, officials reined it in during the crisis and government agencies were initially slow to increase spending again. However, many agencies now are spending more money and, as a result, pulling the economy along. This is not an all-out Works Progress Administration (WPA) type of fiscal stimulus program, of course. Instead, it is a return to more normal government spending. However, when compared to the attitude of austerity early on in the recovery, this level of spending feels like a healthy shot of fiscal stimulus.
A slow forward march
The overall lesson here: Our economy, like the centipede, has some legs off the ground and some legs wiggling in the air. The legs propelling the economic recovery have changed over the years, but we are still moving slowly forward. The U.S. economy is not sprinting, but it is making progress. We anticipate that this slow growth mode will continue for several years to come, since the remainder of the world is still working through the great recession of 2008-09.
You know I love a good metaphor, so please excuse me for getting double duty out of this one: The asset classes in portfolios also work like centipedes without all of their legs on the ground.
What do I mean? In 2015, the emerging market and infrastructure asset classes certainly took a break. I’d say they had most of their feet waving in the air, since both lost money. In 2016, we began seeing a complete reversal. Emerging markets and infrastructure lowered their legs and began clearly gaining traction, with both classes showing double-digit gains this year to date.
Indeed, all of our portfolio legs are in firm contact with the ground this year – meaning that all asset classes are showing positive earnings. Better yet, because we believe in diversifying our portfolio, it would be rare to ever go through a time period when all our investment legs lose contact with the ground.
We at RegentAtlantic hope all of your legs are firmly planted on the ground and ready for autumn. If you have any questions about the “standing” of your portfolio or financial plan, please contact me or your Wealth Advisor.
Managing Partner, Chief Investment Officer and Wealth Advisor
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