Chatting with colleagues last week, someone tossed out the phrase “the new normal.” And a co-worker shot back: “What is the new normal, anyway?”
Ever so conveniently, then, on Thursday and Friday I attended the client conference of DeMarche Associates, a Kansas City-based investment consultant. The theme: “The New Normal and How It Affects Investment Strategy.” DeMarche’s audience of pension fund managers and other institutional investors came seeking to divine the outlook for their portfolios – and to get ideas on long-term investing strategies.
But the concept has important implications for investor relations people, too.
What is the new normal, anyway?
The “new normal” is a buzzword current in business and economic discussions. It embraces the outlook that things are not going to get better, at least not much better, for some time. Maybe three, five, eight years. We’ll all come to realize, the narrative goes, that a difficult economic environment has become normal. And if a rapid recovery isn’t going to appear and solve our problems, we need to adapt to hard times and learn to live with lower expectations.
Not everyone believes in the new normal. Pundits seem split 50-50 between those who see a recovery launching us skyward into the upside of a U-shaped cycle and those who see us slogging across the bottom of a flatter, more prolonged U. My intention isn’t to take either side – just to beware of the implications.
DeMarche is in the “new normal” camp. While bullish market gurus pointed the audience to positive signs, DeMarche consultants outlined six “supercycles” since 1890: periods of 15 to 30 years when the market trended strongly up – or down.
Data indicate we’re now in a negative or neutral supercycle that began in 2000, after that lovely 1980 to 2000 period when the Dow soared 1,400%, DeMarche says. The past 10 years have treated long-term equity investors roughly: two bear markets, two bull markets, a lot of pain, volatility and – overall – no gain.
Welcome to the new normal. DeMarche expects this malaise for the stock market and other investments to continue for the next 3 to 5 years. DeMarche analysts list five trends as defining the new normal:
- Slow economic growth – a weak recovery with GDP rising 1% to 3% a year, lacking the oomph to support robust sales and earnings growth
- Consumer angst and frugality – consumers, who make up 70% of the economy, remaining cautious while struggling with debt and job fears
- Declining corporate profit estimates – earnings tending to disappoint if market expectations are based on a strong recovery that doesn’t appear
- Sideway grinding market for years – stocks trading up or down, not unlike the past decade, but without “a rising tide that lifts all boats”
- Volatile bull and bear cycles – within a broader overall trend, markets still experiencing bull/bear cycles and recessions
Bob Marchesi, chairman & CEO of DeMarche, said the market today reflects an expectation of stronger recovery with no fear of a double-dip recession. Equity prices haven’t factored in a slow-growth scenario with a challenged consumer sector, he said. That leads him to expect a near-term correction, followed by lower average returns for equities over the next several years.
Why should IR care? What should we do?
Taking DeMarche’s prognostications for institutional investors and viewing the implications from a corporate perspective, here’s a new normal primer for IR. (Blame me for these ideas, not DeMarche, as they weren’t discussing IR.)
- “Buy and hold” will be less common as an investment strategy. IR has to get used to it. Speaking to an audience of mostly pension fund managers, with very long investment horizons of the kind IR people love, DeMarche is recommending “dynamic” strategies and “tactical asset allocation.” Instead of buying a stock forever, investors may shift money in and out of asset classes based on valuation and changing investment characteristics. IR needs to think tactically, as well, adjusting to changing investor outlooks.
- Hedge funds won’t be fading from the investment scene – probably the opposite. As institutions look to protect assets and wring some return out of up or down markets, DeMarche has dropped the “Alternative investments” label on hedge funds and the like. Institutions may de-emphasize the stigma and allocate more money to managers with nimble market strategies. Hedge funds come in all shapes and sizes, but we shouldn’t exclude them from IR.
- Expect drama, up and down. In the 1930s, the US experienced three bear markets – and three of the best years of the stock market. In a negative or neutral supercycle, DeMarch says, equities may be “churning sideways” for a few years but it may feel like a rough roller coaster. When the market goes up (2009-10?) we shouldn’t break out the champagne and sing “Let the good times roll.” The new normal calls for a restrained tone in IR.
- Consumers may not drive economic expansion of the kind we saw in the post-World War II era. The aging of Baby Boomers, pullback in spending and slowing of population growth will be a demographic drag on the economy for the next 20 years or so, DeMarche believes. One question for IR: What do demographics say about your products and markets?
- No one has a crystal ball – so IR should communicate both the risks and our strategies for thriving in up or down times. If GDP grows 4%, revenue and earnings may boom … but what if GDP grows 1%? What if the economy goes negative and we get that double-dip? While DeMarche’s prediction of disappointing earnings focuses on the S&P 500 as an aggregate, it’s a cautionary note for IR at individual companies.
- Political winds are blowing in a direction more favorable to business – for the moment. But public opinion shifts rapidly. Even a “pro-business” outcome in this fall’s Congressional elections would leave a government facing high debt, on the prowl for tax revenues, and prone to regulatory solutions. The financial consequences may not seem like a tea party.
There’s a somber set of thoughts. I hope we’re not in the new normal – but we all need to prepare for that possibility in communicating with the capital markets.
What’s your view?