Structural Shifts
Financial ecosystems are dynamic, everchanging by policy shifts, technological innovation, and consumer trends. Short-term market behavior (less than a year), is erratic, driven mostly by noise, reacting quickly to news headlines and financial/economic metrics. In portfolios, we make tactical changes in response. Intermediate-term market behavior (1-10 years) is defined by longer-lasting cyclical changes, such as changes in consumer spending (needs/wants), inflation (costs), employment (supply of capital), and policy (restrictions and/or incentives). We structure our portfolio based on a business-cycle approach. Long-term market behavior is driven by slow-developing and semi-permanent structural changes. Our portfolios are structed based on our secular views over this time horizon. For the baby boomer generation, housing and education was affordable, but for the most part, the excess wealth which leads to discretionary spending and credit availability was not. Over the last few decades, technological innovation has enabled US consumers to have more for less, and the expansion of financial markets and instruments has allowed them to leverage credit to have something now rather than later. We believe US consumers may be around the tipping point of longer-term structural changes.
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