Recently, global markets have continued to struggle and positive returns have been illusive, regardless of the type or location of the investment. Although this hasn’t done anything positive for the balances in our portfolios, if we take a moment to consider the economic conditions that this period has helped foster, we begin to see what could turn out to be favorable environment for a widespread global resurgence.
These periods can be difficult, and often we may wish they didn’t exist, but in order to create an environment conducive to further growth and expansion, they are necessary. This sideways movement and recent correction should allow us to continue along a more modest trajectory as we move forward. From our perspective this period has been a net positive. Given the option, we would always prefer a more contemplative market, one that places one foot in front of the other over one that dashes headlong toward the finish line.
This past year has allowed economies around the globe to continue working through their own processes as central banks continue to stimulate by easing monetary policy. As globally diversified investors, this could be excellent news for our portfolios. Here in the U.S. we have been experiencing increases in wage growth, alongside increasing consumption. If this trend continues it has the potential to create enough demand to begin a self-perpetuating global growth cycle.
In addition to continued strength in the U.S., another important element of this scenario is the Chinese consumer. Current data coming out of China is difficult to interpret, let alone rely on, but if we see a continuation in the longer-term trend in Chinese consumption it will only add to the demand-side of the equation. Demand from the U.S. may be enough to start the cycle, but a contribution from China would certainly help the process move with more conviction.
Commodities prices are depressed, and have been in a 6-year bear market. As a result, low wages and high jobless rates have plagued the emerging market economies that are heavily dependent on revenue from the extraction of these raw materials. If demand from the largest economies of the world materializes, commodity prices will begin to rise. Rising prices translate directly into increased cash flows to these emerging markets, creating new jobs and more disposable income.
Orders begin to appear for the heavy machinery, tools, and equipment needed to produce and transport these raw materials; pent up demand that has been building in these economies for the past 6 years drives new orders for automobiles, refrigerators, and televisions. Demand begins to rise for the materials used in the production of these goods, which feeds right back into the economies that produce them, creating a virtuous cycle of demand. In this type of scenario, the diversifying investments that have continued to drag on our portfolios have the potential to become our best contributors.
Although in recent months, markets have not brought much to investors other than a whole lot of volatility, we believe this has been productive in that it has strengthened the global foundation and created what we believe will be an increasingly favorable environment for our portfolios. The U.S. Economy continues to make measurable progress, and we are eager to see whether there will be enough of a spark to ignite a global recovery. We are optimistic about the rest of the year and are looking forward to seeing how it will unfold.