In today's era of increasingly abundant information,
separating truly meaningful market signals from the mountains of
daily noise has never been more challenging, or more vital for
Larry Fink recently advised you to "
tune out the noise
" if you want to be a better investor. He suggested focusing on
your long-term investing goals rather than on all the information
swirling around in news media about the markets' daily ups and
In addition to focusing on what you're trying to achieve, I
believe three big picture changes happening today are also worth
tuning into, as they have real implications for the economy,
markets and portfolios over the long term. In other words, it's
worth stepping back and considering these three broad shifts that
I believe will hold an outsized impact on effective investment
decision making in the years ahead.
The developed world's aging populations.
Populations are rapidly aging in most developed countries. The
proportion of the developed market population older than 60 years
came in at roughly 15% in 1975, but it's expected to double to
30% by 2025, according to United Nations estimates.
Demographic shifts of this kind can stress an economy because
it's generally the working-age population (say, those ages 20 to
59) that delivers both
gross domestic product (
growth and capital market appreciation, while the tails of the
population distribution (children and retirees) tend to be
dependent on others and have less of an impact on growth in the
economy or markets.
In addition, as more and more people reach retirement age,
labor forces typically shrink, and greater numbers of people take
advantage of entitlement programs. In combination with developed
countries' already high sovereign debt levels, this is likely to
challenge the ability of many governments to maintain entitlement
spending (i.e. programs like Social Security).
The phasing out of financial repression.
The United States seems to be in the process of departing a
regime of financial repression, i.e.
one where a government takes measures to channel
funds into its own debt
. Overall leverage in the United States has come down from
peak levels in many segments of the economy, including the
corporate and housing sectors. And while government sector
indebtedness is still quite high on an absolute basis,
higher-than-expected revenue attainment and modestly lower
spending levels have brightened the picture for this segment of
the economy. Indeed, the budget deficit as a percentage of GDP
has improved markedly over recent quarters and this has required
lower levels of debt issuance.
A U.S. economy slowly emerging from financial repression,
coupled with robust credit availability, should continue to allow
corporations, especially higher-rated ones, to benefit
shareholders through capital structure arbitrage, while not
appreciably hurting debt holders. In other words, cheap financing
and easy financial conditions can create a framework for equity
optimization that allows risk asset prices to grind higher even
in the face of what some believe are extended valuations.
The pace of technological changes.
In recent decades, new technologies have displayed a remarkably
rapid diffusion into general use,
displacing employment in many sectors of developed world
. This is only likely to continue in the years ahead as many more
jobs are automated and fewer workers are required. As such,
is likely to remain elevated and broad-based wage growth should
stay suppressed, helping to hold down
(inflation in the real economy is driven by increasing wages for
the labor force).
So why do these three shifts matter? It's vitally important
for you to attempt to understand the broader secular factors
impacting economies and markets today. Appreciating their
influence can help you position yourself defensively, when
needed, or potentially capture compelling investment
For instance, as my colleague Russ Koesterich wrote in a
Market Perspectives paper
a while back on the developed world's changing demographics, in
an aging world, markets offering growth are likely to command a
At the same time, once you have an understanding of these
shifts, it's easier to grasp why we may well see the
Federal Reserve (Fed) raise rates earlier than many market
. Today's excessively low rates are encouraging many potential
retirees to stay in the labor force longer, crowding out the
younger generation and helping fuel high levels of student debt.
At the same time, they're also encouraging corporations to engage
in aggressive stock buybacks at the expense of capital
Source: BlackRock Research
Rick Rieder, Managing Director, is BlackRock's Chief
Investment Officer of Fundamental Fixed Income, is Co-head of
Americas Fixed Income, and is a regular contributor
. You can find more of his posts