Let’s be optimistic and assume for a moment the markets have indeed turned around and the next bull market has begun. What will the recovery look like? The question requires a brief comment about our economy. Capitalism is the most wealth-enhancing economic system the world has seen, but one of its most troublesome traits is that it is a system prone to excess and distortion. This is why sustainable investing is so important. Sustainable investing helps correct the excess and distortion that allow a few to profit so handsomely at the expense of so many who live in poverty. Sustainable investing helps correct the excess and distortion that allow the global economy to plunder the earth and ruin our planetary ecology.The recent past has illustrated another persistent point of economic excess and distortion. There is a built-in, systemic incentive for short-term profit that propels most of the investment world to invest to the point of excess in various segments of the economy. In the late 1990s, excess investment in the Internet and high tech led to the market bubble that burst in 2000 leading to a three-year bear market. Our most recent bull market (2003-07) saw excess investment in real estate, giving rise to those famous mortgage-backed securities, the implosion of which in October 2008 caused the end of Wall Street as we knew it and the worst market decline since the Great Depression.
Government economic incentives can help when our bubbles burst. They can also help set the scene for the next bubble. As James Altucher recently noted in a Wall Street Journal article, the Internet bubble was fueled in part by Alan Greenspan’s worry in 1999 about Y2K (remember that?). He injected $50 billion into the economy to help the banks deal with any possible emergencies, and investors took that cash and doubled the Nasdaq 100 in less than a year. In early 2001, after the dot-com bubble burst, Greenspan began cutting interest rates steadily, and then injected more cash post-9/11. Housing prices skyrocketed, and that fueled the real estate bubble.
Now, the Obama administration and other world nations are again injecting cash into the global economy, trillions of dollars worth – economic stimulus like the world has never seen. Likely, this will help fuel the next market bubble, but where?
My bet is the next bubble will be green. What everyone knows now is that business as usual is killing our planet. Sustainability is where we need to go and one very important economic player, the Obama administration, knows it and is putting a pile of its money behind its commitment. Sustainable portfolios (like those at First Affirmative) might well be in front of the next big excess in our global economy, an excess of green.
If our portfolios do prove to be advantaged in the next bull market, so be it. An excess of green is just what the planet needs right now. But we will be wary, also. All bubbles burst eventually, whether or not they happen to be beneficial. As this bubble develops and your portfolios recover, you will want to stay diversified and in close communication with your investment advisor.