Publications

Global Marketplace is Good for Stock Marketplace

Dayton Business Journal - December 2005
Expert Advice Column by Kathleen A. Carlson

Just like clockwork, we are approaching that time of the year when we begin reading about predictions for stock market returns over the next twelve months and beyond. Given that no one really knows the levels at which the equity markets will be trading in 2006, investors really need to take these predictions with generous amounts of salt.

We don't profess to know with exactness the levels at which stocks will trade in the coming year, but we believe the equity market should do well. The primary catalyst for higher stock prices will be the continued globalization of economic growth. Millions of new consumers are in the process of entering middle-class status in the areas of China, India, South America and Eastern Europe. Yes, most of these workers are paid much less than the prevailing wage rates in the U.S., but for them, these wages represent a huge step up the economic ladder.

Think in terms of relative population: India and China combined have over 2.4 billion people or almost 7 times the population of the U.S. Economic realities in these developing countries will not change overnight, but the wage gains for these laborers will give millions and millions of people disposable income for the first time in their lives.

Current raw material price increases are a by-product of these expanding societies. But as we've seen throughout history, higher commodity prices eventually beget higher levels of production. In the meantime, economic globalization will have enormous implications for companies in the U.S. as they provide the products and services that businesses and consumers need in the developing countries.

Inflation will remain well behaved as new jobs and wealth are created. We are already seeing labor concessions in the auto industry. Yes, our economy has been impacted by rising prices in some non-commodity areas, such as college tuition, cable television, and medical supplies and services. While global competition has not been able to affect these costs, it has made a large impact on other products and services such as computers, video and electronic equipment, apparel and information technology services. About the only development that can unfavorably impact inflation is protectionism, which will kill the cost savings on products that result from global competition. Even though our elected representatives may capture TV time with their political posturing, we are optimistic they will avoid protectionist legislation.

We don't pretend to gloss over the problems our country faces such as terrorism, rising budget deficits, and the impact of retiring baby boomers shifting to more conservative asset allocations, but our history is one of continued prosperity despite prevailing problems. From our experience with the Industrial Revolution, if you had told farmers in 1910 that the next 90 years would witness an 80% reduction in the number of farm workers, they would have lobbied Congress to ban machinery. Instead, new jobs in new industries were created, while farm productivity improved markedly, resulting in increased standards of living for all Americans. We think similar benefits will result in our country and in our financial markets from economic globalization.