Investing in a New Market Regime

At first glance, the demands of the UAW are nothing new: higher pay, better hours and more benefits. A closer look shows that the world has changed drastically since the pandemic.

This article examines the implications of this new environment on investors.

The new market regime

BlackRock recently set a framework for seeking opportunities in the “new market regime.”^[1]

The new regime features continued cost pressure amid supply constraints: fewer workers in aging populations, less efficient trade due to fragmented supply chains, and higher energy costs in the low-carbon economy.

The combined inflationary cost pressures mean a prolonged high-interest rate environment as central banks attempt to restrain inflation. Also, higher interest rates lead to more volatile markets and greater divergence in performance among stocks and sectors.

The chart below shows that the performance of individual securities is less likely to follow the Russell 1000 Index.^[2]

^{Source: BlackRock}

Implications for investors

The above has mixed implications for investors, who achieve so-called “beta” returns from investments in the broad market, and “alpha” returns from individual investments that outperform the market.

The bad news is that it is no longer possible to achieve strong and steady returns by investing in broad asset classes or indices. Higher interest rates reduce returns and increase volatility, making markets less stable.

The good news is that the greater divergence in performance among firms allows investors who have the acumen to spot opportunities to outperform.

The chart below shows that semiconductors and equipment have outperformed the broader technology sector and other sub-sectors.^[3]

^{Source: BlackRock}

Without the high correlation among stocks in each sector, selection becomes key.

The new approach

Most important is the awareness of the so-called fundamental “mega forces” (as coined by BlackRock). Familiar phenomena like the UAW strike belie the mega force of a shrinking workforce that increases costs for manufacturers, especially as de-globalization decreases the pool of available workers.

Another mega force is the low-carbon agenda, which could change the skillset required radically (e.g. electric vehicles). Moreover, the rise of artificial intelligence (AI) and robotics reduces the need for traditional workers.

Improving pay and benefits for workers in the US auto industry is only a partial solution. Auto manufacturers must grapple with re-skilling workers and downsizing to ensure a viable future.^[4]

Conclusion

Awareness of the fundamental shifts is important, but it is not enough. What matters is making concrete investing decisions, which requires expertise in multiple fields. In an age of new paradigms and fading certainties, wise investors need the help of experts.

_{^[1] BlackRock}

_{^[2] BlackRock}

_{^[3] BlackRock}

_{^[4] Harvard Business Review}