FSG Blog
December 12, 2023

Pondering the Uncertain Future of Investment 

Peter Kennedy
FSG Principal

If a recent piece in The Economist magazine has it right the future of investment is going to be more challenging than it has been for 40 years or more. Reading this, we sat up and took notice.  For scenario planners – and doubtless for many of our readers – it’s a subject worth pondering even if one does not agree with the conclusions. 

So what’s going on?

Notwithstanding the Great Recession of 2007-09 and dramatic stock drop during COVID many analysts who study long-term financial trends believe the last 40 years were a unique golden era of investment. Over the last four decades shares realized annualized real returns of 7.4% compared to 4.3% over the preceding eight decades, according to The Economist.  What’s especially noteworthy is that over that time bonds boomed, too, with real annual returns averaging 6.3% versus 0% for the previous 80 years. 

What skeptical analysts are warning about is that markets are regressing to the long-term trend of very modest returns, which would fail to deliver on the savings needs of average US households. 

The obvious question is this: What’s changed that will make the future less bright and certain for investors? There are as many theories as there are pundits. But a common explanation is that the time from roughly the early 1980s through the early 2020s benefitted from unique circumstances, namely an unprecedented convergence of globalization, tech-led high productivity growth, and low interest rates. Together, these propelled a sustained rise in stocks and bond values, even taking into account the disruption of the 2007-09 Great Recession. 

Future of Investment Options for Next Gens

Long-term bears insist this value-boosting convergence is not likely to repeat. They contend: Globalization is in reverse. China’s economic ascent has already happened. Productivity growth has stalled. And interest rates could stay higher for longer, at least in part owing to rising government debt the world over. The net result of all this would be miserly returns on both stocks and bonds.

If this bearish view is right, then it’s definitely bad news for the generations following the Baby Boomers. In effect, once tried-and-true strategies of investing college and retirement savings in a balanced mix of relatively low-risk, low-cost index funds will not deliver returns anywhere close to what Boomers enjoyed. Savings goals for college and retirement would be elusive (for those fortunate to have any savings to begin with).  

But it would be wrong to assume a static state of affairs. To start, low yields from traditional investment products would logically drive demand for higher-performing although arguably more risky options – crypto (if it’s still a thing), hedge funds, private equity, commodities, rare minerals, and financial products that don’t even exist today. Possibly these will in turn eventually become mainstream, like Fidelity, Vanguard and Schwab funds are today. But early adopters are apt to encounter an intimidating range of untried options. And all investors will have to learn to live with greater volatility and risk if this long-term bearish view comes to pass.

But what if…

FSG scenario planners are wholly on board with the view that investors are headed into complex, uncertain and to some extent unprecedented conditions. But some of us have been around long enough to recall other similarly volatile times, when economists and analysts made panicky predictions about the end of just about everything we knew as truth.

Yet markets adjust and recover. We recall that at the nadir of the Great Recession (February 2009), the S&P 500 was down 57% from its high. That was a grueling and scary time to live through. But the S&P index recovered all of that by mid-2016. Investors who stuck it out did just fine. Same thing with the S&P tumble at the start of COVID in 2020. That recovery was even quicker.

As to the belief that the drivers of markets – productivity, innovation, interest rates, etc. – are all trending in the wrong directions, there’s scope to push back on those assumptions, too. Generative AI alone could be game-changing in terms of its impact on productivity, innovation, and growth across practically all industries and markets.

At this point, we can only speculate about AI’s effects, both positive and potentially destructive. But it’s reasonable to believe AI will drive a net positive transformation, not just for the tech sector, but across just about every domain of life. A new “golden era” of investment is not at all implausible, in a scenario planning sense.

In these volatile and uncertain times, that’s a positive thought to end the year on.

Happy Holidays. 

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3 thoughts on “Pondering the Uncertain Future of Investment ”

  1. Starting from the outside in is always wise. The Economist focuses on traditional measures of financial instrument value. But stepping back, what will drive investment opportunities are things such as the fate of AI and globalization that you mention; global rivalry and conflict (or harmony); the rule of law in the U.S. and elsewhere, and the trust the public puts into financial regimes; and wealth and income distribution. Different scenarios can be written for each of these, which makes the Economist article a single point forecast with a very low probability of capturing the critical forces that will define the future of investment. Only rigorous imagination can generate the full range of plausible outcomes we could face.

    (Written somewhere between Auckland and Chicago on a flight that took off at 9PM Wednesday and will land at 4PM Wednesday…)

    • Thanks for your comment, Patrick.

      In fairness to The Economist article (Full disclosure: I worked for The Economist Group in a previous life), it’s actually less predict-y than appears at first glance. But I agree with your bigger point that the future political-economic-security-governance context will be all important in understanding future market growth and that there is not a single context but multiple plausible ones that need to be explored if risks are to be managed and opportunities not missed.

  2. Just one thought to add to the original blog post. Seems that the chorus of voices worried about the stock market’s future performance is growing larger. Diverse actors such Goldman Sachs and the Federal Reserve are now warning that the “tailwinds” driving equity values up in recent decades are not going to be repeated. Take tax cuts. From 1989 to 2019 the effective tax corporate tax rate on US firms fell by three-fifths, while lower interest rates cut borrowing costs by two-thirds. These convergences had seriously beneficial effects on shareholder value, which are not likely to be repeated in the same way.


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