Welcome to the February edition of FAQs and RAQs!
Here we tackle client questions—some asked Frequently, others Rarely.
FAQ: Some of the challenges facing the economy – namely the U.S. debt – seem insurmountable. Should I change my investment approach?
The history of the economy and the stock market is really a history of overcoming hurdles people once thought were impossible to clear
For example, go back to 1798, when British economist Thomas Malthus warned that population grows exponentially while food production grows linearly, so the world would soon run out of food. That didn’t happen. Today, the word “Malthusian” gets used as an insult.
In 1972, the Club of Rome predicted the economy would hit “The Limits to Growth” and be unable to produce enough goods to meet rising demand. That didn't happen, either!
Twenty years ago, investors worried about “peak oil,” the idea that conventional oil reserves were running out. That anxiety led to horizontal drilling, and now America is practically swimming in oil.
Today, we’re watching some long-time obstacles fall – or at least wobble - in real time:
1. After decades of struggle, the Japanese stock market is no longer left for dead by investors.
2. The City of Detroit, after restructuring, has run a budget surplus in recent years.
3. China, which faces severe demographic challenges, is deploying AI-powered robots to supplement its shrinking work force.
You can bet against the future by sitting out the stock market. But history suggests a better approach: keep an open mind and allow yourself be surprised.
RAQ: Is today a repeat of the 1990’s technology bubble?
In reality, this is a very frequently asked question in the financial media. However, we find that investors who actually lived through the 1990’s tech bubble rarely ask it, because today’s market doesn’t seem to have the same feel to it.
Unless you lived through the ’90s tech bubble, it’s hard to appreciate, in retrospect, what a fantasy world Wall Street was living in. Investors thought risk had been removed from the system.
Five examples:
1. Pax Americana — After the fall of the Berlin Wall, Americans thought peace was the new normal. 9/11 shattered that illusion.
2. Budget Surpluses — The U.S. ran a budget surplus from 1998 to 2000. President Clinton proposed paying off the entire national debt by 2015. $30 trillion later, we know how that went.
3. The Maestro — Investors had near religious faith in Fed Chair Alan Greenspan to avoid recessions and support the stock market. Today, the Fed finds itself in a very different situation!
4. The New Economy — Investors believed technology would transform the economy so completely that recessions were a thing of the past. Imagine today’s AI optimism, but without any skeptics because nobody knew better.
5. Get Rich Quick — Forget "diversified portfolios." Investors treated Wall Street like a casino jackpot. Today, that speculative impulse is partially absorbed by other digital marketplaces.
For a true bubble to form, it requires a great deal of make-believe by investors.
Have a question?
Drop us a line at carlsongroup@rwbaird.com. We’d love to hear from you!
All investments carry risk, including loss of principal. Past performance is not a guarantee of future results.