EIGHT YEARS
AND COUNTING

Can the Bull Market Continue?

An aging bull market and a 10-year economic expansion have us, like many investors, wondering: How much longer can this rally continue? But signals from our Adaptive Multi-Asset Solutions team's proprietary options pricing model suggest a correction is not imminent.

Global stocks have enjoyed a good run, roughly tripling since the financial crisis. Options prices, which indicate the market’s assessment of short-term risk, signal limited upside, but do not forecast a looming downturn. On the contrary, the equity market appears fairly priced given a number of positive factors that could propel the current business cycle, including potential U.S. tax reform, continued quantitative easing in Europe and Japan, and an upward trajectory in global growth. Inflation also remains subdued, thanks to new technologies that improve efficiencies and keep prices in check.

The options market does not believe that the equity market has to self-correct just because we’re a decade into the expansion, while the average business cycle lasts six years. We’re in the camp that this expansion can continue."

- Ashwin Alankar, Ph.D.
Global Head of Asset Allocation and Risk Management

The options market does not believe that the equity market has to self-correct just because we’re a decade into the expansion, while the average business cycle lasts six years. We’re in the camp that this expansion can continue."

Ashwin Alankar, Ph.D.
Head of Global Asset Allocation & Risk Management

In other words, barring unforeseen economic or political shocks, the global economic barometer is set to fair. We argue that some of this benign outlook is due to the options market’s expectation of an orderly unwinding of the ultra-accommodative monetary policies in the U.S. and Europe in the next few years.

The Federal Reserve is expected to continue raising interest rates gradually in 2018 and beyond, while slowly reducing its $4.5 trillion balance sheet. The European Central Bank, which has yet to begin tightening, is focusing on tapering asset purchases first and will likely raise rates at a later date. This staggered approach could help global markets avoid a sudden liquidity crunch that would curtail growth, create a headwind for equities and cause global bond yields to spike – more reason to believe the current expansion can persist.

Investment may be Increasingly Powered by Four Connected Themes

Nobel Laureate Myron Scholes, Ph.D., Chief Investment Strategist, believes that four powerful and interconnected forces could increasingly shape investment decisions: technology, demographics, scarcity and governance. Innovators capable of developing solutions that adopt or, in some cases, slow these trends will be poised to succeed as these forces evolve.

Technology

Repatriation of Manufacturing Jobs

Society is moving toward the era of big data, powered by connected devices, artificial intelligence and cloud-computing platforms. These efficiency-boosting innovations create opportunities for nimble firms that understand customers and deliver bespoke products and services. “Additionally, machines work 24/7, diminishing labor arbitrage,” explains Dr. Scholes. “This will incentivize companies to bring production back
to the U.S.”

Demographics

Expanding Urban Populations

Demographic trends are also reshaping society. According to the United Nations (UN), half the global population lived in cities in 2008. By 2047, the UN projects that number will increase to 75%. “This creates the problem of how to build cities with clean air and water, as well as sufficient food, power and transportation systems," says Dr. Scholes. Aging populations also increase the burden on technology and health providers to devise solutions for age-onset conditions.

Scarcity

Resource Substitution and Creation

Although rising populations strain natural resources, technologies can intermediate supply through substitution or creation. “Local micro-grids will distribute power more efficiently, and desalination will make potable water more abundant,” says Dr. Scholes. We’re already seeing efficiency gains in agriculture: Drones are scanning crops for signs of drought, then autonomously telling smart irrigation systems where to water.

Governance

Fostering, not Impeding, Innovation

Onerous regulations could cause innovators to stumble, creating risks for investors. Governments should help innovators by creating a regulatory framework that protects consumers while fostering innovation and growth. “Technology and innovation help growth by compressing time, individualizing production, and improving quality and choice at a lower cost,” Dr. Alankar says.

Technology

Repatriation of Manufacturing Jobs
Society is moving toward the era of big data, powered by connected devices, artificial intelligence and cloud-computing platforms. These efficiencyboosting innovations create opportunities for nimble firms that understand customers and deliver bespoke products and services. “Additionally, machines work 24/7, diminishing labor arbitrage,” explains Dr. Scholes. “This will incentivize companies to bring production back to the U.S.”

Demographics

Expanding Urban Populations
Demographic trends are also reshaping society. According to the United Nations (UN), half the global population lived in cities in 2008. By 2047, the UN projects that number will increase to 75%. “This creates the problem of how to build cities with clean air and water, as well as sufficient food, power and transportation systems," says Dr. Scholes. Aging populations also increase the burden on technology and health providers to devise solutions for age-onset conditions.

Scarcity

Resource Substitution and Creation
Although rising populations strain natural resources, technologies can intermediate supply through substitution or creation. “Local micro-grids will distribute power more efficiently, and desalination will make potable water more abundant,” says Dr. Scholes. We’re already seeing efficiency gains in agriculture: Drones are scanning crops for signs of drought, then autonomously telling smart irrigation systems where to water.

Governance

Fostering, not Impeding, Innovation
Onerous regulations could cause innovators to stumble, creating risks for investors. Governments should help innovators by creating a regulatory framework that protects consumers while fostering innovation and growth. “Technology and innovation help growth by compressing time, individualizing production, and improving quality and choice at a lower cost,” Dr. Alankar says.
Source: Janus Henderson Investors, United Nations
*Estimated
Four Themes will Increasingly Impact how the World Evolves
Nobel Laureate Myron Scholes, Ph.D., Chief Investment Strategist

TRANSCRIPT

The four things that I keep in mind at all times when thinking how the global world will change, is one is demographics, two is technology, three is scarcity, and four is governance or politics, And basically the four things, are inter-related with each other. You don’t have technology independence of demographics. You don’t have technology independence of scarcity, and you don’t have politics independent of scarcity or demographics ect.

The question is why? How can we have cities being sustainable? What does that do to technology? How does technology help with healthcare? How does it help with handling their lives?

Robotics, how robotics affect production and innovation, and how robotics come in to the system are something that has to do with how we handle scarcity, or how we handle, you know provide things faster and less expensively, faster and less expensively. Like right now in the United States we have robots, okay, that basically, or drones now, that are flying over fields and have infrared cameras. And what they’re doing is they observe the field. Instead of just throwing water everywhere on the field, now they know where the hot spots are, they know exactly what needs to be watered as opposed to “one shoe fits all.” You may get more individualized. If you can have a robot weeding the field, and weeding the whole field in a matter of no time at all, you don’t have to put pesticides down. You don’t have to kill things, you know. Basically we can have pure agriculture and soil instead of it being denuded and wrecked, and we don’t have an ability to preserve our food stock, This allows for a future of using technology to enhance the value of all of us.

What it means is that in-sourcing in the United States is something that I see as a great growth for the future. The idea that with robots and more technology, it’s much better to produce at home, in the United States.

It's not going to be alone, it’s going to maybe compete against China or other parts of the world, there’s a huge demand there, and there’s a huge demand in other parts of the world. We’re going to have 9-1/2 Billion people in the world by maybe 2060, 2070, 9 Billion and still about half of them probably are going to be living under $1 or $2 a day in income. And we have to think about how they become inclusive and become part of society, through distance learning, through selforganizing learning, through other things. To go up the learning curve which makes everyone more productive. We have an inclusive society. They can use the cell phone to transact with; it’s much different than having to carry around money or not knowing what to do with your money for investment. There’s myriad, just wonderful things ahead. I wish I were 20 years old and I can start over again.

Key Takeaway

Investors should be cognizant of the disruptive potential of technology and the impact that demographic shifts will have on our ability to economize increasingly scarce resources. To truly realize the economic benefit of these trends, governments need to create regulatory environments that embrace and nurture innovation, rather than impede it.