New Leadership…in Golf & the Markets

The tariffs and trade regulations during the last Administration may have begun a process of reducing global trade in favor of onshoring production. The supply chain issues caused by the global pandemic will accelerate companies’ desire to move production closer to home. Finally, the potential for a shift in the geopolitical calculus in Europe given the Russian/Ukraine war will affect corporate management teams’ views on where to source products and materials.

If globalization over the last 20 years had the impact of reducing inflation, then a reduction in globalization could have the opposite effect and cause the average rate of inflation to remain higher over time. Certainly not the level we see today, but nonetheless elevated from the last decade’s average.

Higher inflation means higher interest rates, and it seems likely that at this point the neutral rate for Fed Funds rate (a short-term interest rate targeted by the Federal Reserve) will also be elevated. This suggests that interest rates across all maturities will be higher.

This doesn’t mean we abandon bond investments, but it does mean we invest in fixed income securities that produce more cash flow (which can be invested as rates move higher) and hold our average maturities at current levels, closer to four years, rather than selling existing positions.

Stock Market

In the coming 10 years, companies that have relied on off-shoring production to reduce their costs and improve their margins will not fare as well. Technology companies in particular may need to manage a higher cost structure as they alter their supply chains. That doesn’t mean we abandon those investments. However, we need to be thoughtful regarding how much they should be overweight given their outsized exposure in benchmark indices such as the S&P 500 Stock Index.

This chart shows technology and communication services stocks (social media companies are included here) as a percent of the index, and you can see that they have reached the same peak representation as in 2000.

At the same time, companies in the energy and materials sectors have become less than 10% of the index after peaking near 20% before the 2008 financial crisis. Many of these companies may benefit from secular themes such as higher inflation and transitions to greener forms of energy electric transportation. As these themes unfold, it may make sense to add to energy and materials companies’ portfolio weights.

Leadership may endure

As leadership in markets changes given global-macro trends, portfolios can be altered to reflect these changes without abandoning current positions. Just like those twenty-somethings on the PGA tour who are taking over, they’ll likely be in leadership positions for some time.