Jerome Powell’s speech at the Jackson Hole conference last month garnered a lot of attention, but perhaps more should be paid to Agustin Carstens’ speech instead, contends an article in Barron’s. Carstens, the head of the Bank for International Settlements, spoke about the volatility in the market and his belief that it’s not a fluke; rather the entire global economy is in the process of transformation that will force much rethinking of economic policy.
For nearly 30 years, the market experienced low volatility and central banks were quick to step in when there was a bump in the road, such as bank bailouts in 2009 and stimulus money in 2020. Thanks to many of those policies, corporations—as well as retailers, manufacturers, and financial institutions—took greater risks. But those fiscal policies have now not only stagnated, they’re actually reversing, fueling greater volatility. In addition, geopolitical tensions around the globe are causing instability, and the future of Big Tech is uncertain as the federal government reexamines their role in the economy. And of course, Covid continues to disrupt businesses’ operations. Companies need to be resilient, the article maintains: “You cannot allow your supply chain to be at the mercy of Chinese politics, land wars in Europe, or natural disasters.”
As companies adapt and the federal government revives trade and industrial policies in an effort to shift crucial production back to the U.S., investors will feel the impact in two different ways. Companies that have a solid focus on growth, security and domestic labor are likely to outperform in this new era of volatility. And investors should expect this volatility to persist. Supply-side policies could help solve some of the country’s economic issues, but those take a long time to enact. Investors should expect quicker cycles of “booms and busts” and abandon strategies that rely on low volatility which are likely to underperform. Global macro investing could come back into fashion, and investors who keep track of “changing mega trends and their implications for both economic policy and asset markets” can find themselves some protection from volatility in the years to come.