For decades, globalization has been on an inexorable rise, a key pillar fueling economic growth, driving inflation and yields down, bolstering corporate profit margins and supporting an upward climb in market valuations. Over the past few years, though, cracks have started to develop in globalization, as populism has seen a resurgence and trade wars have erupted.
As part of AB’s Disruptor Series, we’ll explore changes in this and other secular trends that have supported returns for decades—and its implications for portfolio construction.
The COVID-19 pandemic and war in Ukraine have shown global supply chains to be fragile—with firms scrambling to address gaps. And because the gains from soaring markets have fallen more to capital than labor, unsettling income inequality has stoked a reaction against globalization. Collectively, these developments have led some to ask if globalization has peaked—and might give way to deglobalization, with big implications for economic growth, inflation and markets.
The Rise and Decline of the Fundamental Super-Cocktail
The bonanza for capital markets since 1980 hasn’t been all about globalization. That’s just one ingredient in a fundamental super-cocktail that also included powerful forces such as automation and technology, as well as what was then the largest labor force in human history. Meanwhile, falling—and low—inflation became a huge catalyst for valuation multiples and markets.
The results were spectacular. Since 1980, the S&P 500 has delivered an annualized return of 12.2%, well above the 7.9% for the three decades or so pre-1980. Since 1980, the traditional 60/40 portfolio of stocks and bonds returned a whopping 10.5% annualized.
The super-cocktail actually began to fade around 2000, as the Baby Boomer generation began to exit its peak earnings years. Interest rates had largely reached their natural bottoms, too, and productivity gains started to slow in developed economies—moderating the growth in gross domestic product (GDP). As relative household wealth continued to soar, heady markets endured a series of crises—the tech bubble, global financial crisis and the COVID-19 pandemic—and subsequent recoveries supported by extraordinarily accommodative fiscal and monetary policy.
The (Harder) Road Ahead for Investors
With the super-cocktail weakening, we think investors face a very different landscape as we move forward (Display). Economic growth rates are moderating and will likely be lower in the years ahead, amplified by increasingly unfavorable demographics. Inflation, though not likely to stay at its current highs, will probably be structurally higher from here.
