The Dow, Heng Seng, and even the Nikkei have rallied to multi-year and all-time high levels. But does the bullishness match up with the global economic reality? Kim Parlee talks to Michael Craig, Sr. Portfolio Manager, TD Asset Management on whether a reality check is in order.
Here to give us big picture perspective, Michael Craig. He's senior portfolio manager at TD Asset Management. I don't know if he's in a good mood or a bad mood. We'll find out in terms of his outlook in the market. It's good to have you back.
We're seeing bull markets everywhere. And we continue to see these bull markets everywhere. Will we continue to see bull markets? That's the big question. What are the underlying-- what are the underpinnings right now? And how is that looking for-- as we look ahead?
Well, this has been underpinned by actual solid economic growth. The IMF just recently upgraded their forecast for 2017 and 2018. And PMI indices, which are a phenomenal leading indicator for growth and earnings, have all been pointing up around the world.
And why are they phenomenal indicators, just to tell us a bit about that?
There's been some interesting research done by the Dallas Fed years ago. They found that both the trajectory as well as the level of these things are very helpful. And they really measure market sentiment indications of buying goods, hiring people, et cetera. So they're good cross-barometer of corporate America or corporate world.
Generally speaking, they lead earnings as well as lead growth going forward. And so whether you're in Japan, Europe, US, or China, they've all been upwards and pointing to the right over the last 18 months.
As we can see, we've got them all up right now. So that sounds good.
It's good. You got to sometimes split out the structural and the cyclical.
This is a cyclical phenomenon. It's an 18-month trend where you're going to make a lot of money in the stock market. And things are pretty good. But it's not a structural phenomenon such that we're going to lead to a higher level of growth rate over the next five to 10 years.
And why not?
Well, you go back to growth. You have to break it down into labor force growth as well as productivity. Labor forces are going to grow tremendously slower in the years to come just because of demographics. We know that's going to be the case. That's going to shave off about a percent on growth going forward.
And so it's about productivity. But productivity-- is it not rocketing?
Here is where it becomes a bit tricky, because the way we measure it, actually-- it's quite poor. And the way it's measured is output divided by hours worked. And if you look at the US right now, it's at a 70-year low. So it's very, very weak on the productivity side.
We would argue, though, through recent research, it's not the right way to think about it, and particularly with-- as economy changes from one of a very industrial and manufacturing to more of a services-based economy, the way we think about productivity has to evolve as well.
I'm a simple girl and a simple concept. So when you say productivity, this is human productivity versus productivity of what we do, because robots, machines, AI, all good stuff-- it's more productive than we are. But we're not measuring that.
Yeah. If you ask someone what they-- give me a synonym for productivity. They typically say efficiency.
And I guess in a very simple basis, output versus hours worked is one way of saying it.
But we would argue that the way to think about it has to be from a demand perspective and a supply perspective.
So demand is how fast we use goods and supplies, how efficiently we create them.
And therein lies the rub, and where you have to kind of think about this quite a bit differently in the years to come.
So take me out. So from a cyclical standpoint-- looking good. The PMIs are all going in the same direction. From a structural standpoint, you've got a concern in terms of-- this isn't a financial market concern, if I'm hearing you right, as much as it is an economic and political concern.
It's a little bit abstract. But if you think about demand, there are things that are going to weigh in demand in the years to come. One is that on the household side, inequality is going to really weigh on demand. Now, this isn't an argument whether inequality is good or bad.
The fact is that the more and more people-- as less and less people control most of the wealth and more and more people are going without, that weighs on demand. So in the US, for example, half the population is living on an average of $16,000 a year.
So even though they'd like to consume more, once they pay rent and pay for food, they have no capital left over, whereas if you take the top one out of every 1,000 people, they're earning about $6 million a year. And unless you're an NBA or a hockey star, it's very hard to spend $6 million through a year. So their savings rate's very high.
So you have a real dampener on demand on the household sector in the US. And this phenomenon is very consistent around the world.
So then OK. So again, shorter term optimistic with PMI-- structurally, concerns about just the people who hold the funds aren't the ones spending the funds, essentially, right? So then what does that mean for the economy? And then what does that mean for the markets? I know you're looking much further out. But how does that look?
Well, one way or another, the demand side will be sorted. In years past, it's actually been a precursor to war. We would argue--
This is not a very optimistic conversation.
I will get better. I promise. And this time around, it was really-- I think there's going to be two kind of thought process going forward. One will be this idea of negative income tax or basic universal, basic wage, what have you. And that'll be the argument from the left.
On the right, really what's needed is retraining such that people can retrain and adapt to the ever-evolving economy going forward. And by the way, the way the economy's going to look 20 years from now, it won't look anywhere like it is today.
If you think of the innovations that are coming through, whether it's driverless cars, which will dramatically reduce the number of traffic fatalities or needs to service transportation-- if you run a trucking company, all of a sudden, your margins are going to explode because you don't need truck drivers. So transportation's going to fundamentally change.
If you think about computing power, we're going to be at the point where it won't cost very much to get the similar computing power of URI. We're going to be at the levels of human intelligence in a few years.
And so the applications that these are going to spawn are things that we haven't even heard of. And so to be able to train people from working in a-- very much an economy where you do the similar job for most of your career to one where you're switching three or four or five careers throughout your career, or three or five jobs through your career, is going to require a constant ability to retrain.
This is a completely unfair question. And I've got 10 seconds left for it. So here you go. So what does that mean for your investments? You're talking about massive social dislocation, rapidly accelerating technology and innovation. So how do you invest?
Start with your goals. What are you trying to achieve? Stick with those-- appropriate asset allocation. And finally, it's alpha, about finding companies that-- where you can actually make gains. Those are the three steps.
We'll get you back more to talk about alpha if we have more time. Michael, thanks so much.
Michael Craig, senior portfolio manager with TD Asset Management.