What's Next

As the record-shattering economic boom of the past decade disappears into history, some committee members have been doing some thinking about what will be the motor of the new century. This is not just navel-gazing: The automobile, the computer, the airplane, and the telephone formed the technological foundation of America’s 20th Century economy. A.G. Edwards Chief Economist Gary Thayer observes that these innovations played a major role in producing the oft-quoted historical returns that the markets have yielded since the 1920s. Advisors are betting on similar returns when constructing asset allocation models for the future. But, Thayer asks, if such revolutionary economic stimuli are not present in the 21st Century, will American business continue to generate the same returns in the future as in the past? “I think about this a lot,” says Thayer. “We’re always trying to figure out if it’s appropriate to change our strategic view.”

Despite such doubts, our panelists hailed technological innovations and the enormous gains in productivity seen over the last five years as a major reason for their continued faith in stocks and American business. On the day that the Labor Department reported that the third quarter rise in worker productivity was a surprisingly large 2.7%, Manley said, “Yes, there is no Great Depression to recover from and there is no World War II to place America in a prominent position. But productivity continues to rise, and as long as that is the case, profits will grow.”

Indeed, from 1973 to 1995, productivity averaged lackluster gains of just above 1% per year. But since 1995, increases have more than doubled on the heels of the information technology revolution. Federal Reserve Board Chairman Alan Greenspan has said he believes that recent gains in productivity will continue for the future. “The pace of innovation is so fast and its ability to deliver cost savings and new products so great, that I see things accelerating for some time,” says Anderson.

Along with technology, most panelists believe that the continuing pace of globalization and the spread of democratic free-market principles across the globe will continue to fuel corporate profits. “The opening of markets, continued deregulation, and globalization are enormous stimuli for the American economy,” says Thayer. “Just imagine if only a tenth of the people in China, Latin America, and Africa bought Intel chips and Ford cars. Globalization is something to look forward to in the coming decades.” Adds Manley: “People want better [lives] for themselves and their families, and the infrastructure to recognize those dreams is only now materializing in some places across the globe.”

These concepts come with a word of caution: Shilling believes price/earnings ratios are out of whack. “Stocks are widely overpriced,” he said a month ago. Also, Shilling is still looking for the oft-noted “capitulation” on the part of investors which he euphemistically refers to as “the puke point.” “I haven’t seen investors saying, ‘Get me out of stocks at any price,’ and traditionally, that is what signals the end of a bull market.”

The events of September 11th may be cause for caution, the panelists say. By many people’s thinking, the attacks will represent only a blip on the screen in the face of the steamroller-like progression of the American economy. Yet Thayer thinks about the arguments he has heard to the contrary. “If we respond to this terrorist threat with isolationism and by erecting barriers to protect our own businesses, things will change for the worse.” At the very least, advisors–even those loath to change their historically based asset allocation strategies in the smallest manner–should give these visions of the future some thought and careful consideration.