In their book The Fourth Turning, William Strauss and Neil Howe argue that American history has moved in cycles that last roughly as long as a human lifetime, within which are four distinct two-decade eras, or turnings. They say that although we think our time is unique, the way people feel today—or at any time—echo the feelings and attitudes and behaviors of past times. Mark Twain’s quote “History doesn’t repeat itself, but it often rhymes,” is a good summation.
These four turnings are like seasons. The first is spring, the birth of a new order, followed by summer, when crops grow rapidly, then fall, where we reap the harvest of past investments, and finally, winter. The fourth turning, winter, is a period of dormancy when the remnants of the harvest become the organic matter that fertilizes crops in the spring. According to the authors, the fourth turning starts with a crisis, when society passes beyond the current world order and begins to define the next one. Many have looked at the bursting of the technology bubble in the early aughts and 9/11 as the crises that started our lifetime’s fourth turning.
Strauss and Howe also argue that each generation has a personality that expresses itself as it matures. For example, what Tom Brokaw called the Greatest Generation, the people who came of age during WW2 and led us through the 1980’s and 1990’s, had a ‘get it done’ attitude and valued compromise.
Following that postwar high came the Baby Boomers, whom The Fourth Turning describes as idealistic young adults driven to right society’s wrongs via affirmative action, desegregation, and equal rights for women. Fights for ideals are hard to win with compromise, however, and Strauss and Howe—who wrote The Fourth Turning in the late 1990’s—predicted the combative attitude of the Boomers would eventually lead to a period of societal division as they took the helm of the world’s governments, corporations, and media. (Prescient, no?)
This phenomenon might help explain the binary left-right split in the American media today and the for-us-or-against-us rhetoric coming from world political leaders. Issues, today—in what the authors would call the fourth turning—are presented, discussed and digested as absolutes: In or out. Good or bad. Have or have not. And the fight for ideals, in which it feels like your side can’t cede any ground to the other side, leads to myopia.
Of course, we all are old enough to know that very few matters are truly either-or situations. The tendency of commentators, politicians, and market pundits to reduce discussions to binary options with binary outcomes is leading to increasing levels of volatility and manic behavior, and a sense that a new spring will not come.
In finance, this fourth-turning myopia, if you will, tempts investors to swing their portfolios from aggressive one moment to hyper-defensive the next, as the predictions of a dire future ebb and flow. You see extreme language in the headlines on a daily basis: “European Investor Sentiment Plummets” (to where it was in 2016. Big whoop). And: “The Dow Jones Plunges More Than 800 Points in the Worst Drop Since February” (neglecting that at the time of that headline, the Dow was still higher than it had been in February). The shrillness of the pundits’ fearful statements can make you think the world is ending and the markets nearing ruins. But, FYI, we are just about flat for the year! In the present time, rational investing feels like pushing a boulder incrementally up a hill. It requires a lot of effort for little near-term impact.
The heightened rhetoric about Britain, and whether it remains in or out of the E.U.; and Italy, and whether the E.U. does or does not approve its budget; and China, and whether we improve our trade relations or not, lead some to see either prosperity or ruin when, in all but the rarest of cases, the reality is somewhere in between.
And that is where we believe we sit today: in between. Economic indicators in the U.S. are strong, with more people working, more wages being earned, and more hours being worked. Households are in better shape for these reasons. Corporations are re-investing in the U.S., which signals additional support for employment, wages, and consumption. Europe has some clouds, with economic activity having slowed, but it appears we are finding the apparent floor. Trade will continue in some form between Britain and the E.U., no matter the outcome. Italy will most likely remain solvent, no matter the budget passed. And China is so isolated from its global trading partners that any illness that affects them will likely not spread to the world.
True, it is a period of cold uncertainty, but not one of deep despair. The depths of winter were likely in our past with the financial crisis of the U.S. in 2008 and Europe in 2012. This reasonable attitude is recommended, moreover, by our risk-detection model analysis. The move-to-cash actions we took earlier in the year, and again in November, mean we are tempered in our exposure* but not hiding under the desk.
At Auour, our mission is to minimize the largest cost investors face, which is the impact of emotional trading, and of deviating from the investment plan initially put in place. Though not perfect, our process has been built on empirical evidence and a rational approach to mitigate market downturns. Therefore, our investment process was constructed for times just such as these. Emotion caused by fear-inducing headlines and tweets can make one feel less in control, but they don’t justify extreme short-term reactions when measured long-term thinking is most required. Our models, to date, have highlighted these issues before they made the headlines. And, at this time, they do not suggest an enduring and material downturn, or in other words, the lack of a new spring.
To your family from ours, we wish you a happy holiday season and a happy new year.
* Current positioning is as follows:
Global Equity Levered: 35% tactical cash
Global Equity: 25% tactical cash
Global Balanced: 22% tactical cash and only 30% equity exposure
Multi-Asset Income: 20% tactical cash and no equity exposure
Global Fixed Income: 20% tactical cash