Fiscal Spending Is Out Of Control | Chris Brightman

Making us more vulnerable to the next adverse economic or market event

We've had two excellent years of returns in the stock market.

Can that winning streak continue into 2025?

And in less than a week, we should know who the next President of the United States is.

How should investors alter their position based on who the winner is?

For answers, we're going to find out how the big players -- those managing tens of billions of dollars in client capital -- are allocating their portfolios right now.

And we'll ask: what can the regular retail investor learn from their strategy?

To find out, we're fortunate to welcome Chris Brightman to the program today. Chris is the CEO & CIO of Research Affiliates, and along with Rob Arnott, is co-portfolio manager on the PIMCO All Asset and All Asset All Authority funds and the PIMCO RAE™ funds.

To give you a sense of the impressive scope of Chris' work, around $150 billion in assets are managed worldwide using investment strategies developed by Research Affiliates.

While he thinks the markets can run higher in the near term, he’s very concerned about the loss of “fiscal room”. Deficit spending is so out of control that we have no budgetary buffer left to absorb the effects of the next adverse event — likely making it substantially more damaging than what we’ve experienced before.

For the details, click here or on the video below:

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Adam’s Notes: Chris Brightman (recorded 10.30.24)

EXECUTIVE SUMMARY:

• Chris remains optimistic about the global economy, attributing resilience to innovation. However, he has a more cautious outlook for U.S. financial markets, expecting roughly 3% nominal annual returns (1% real after 2% inflation) due to high valuation levels. This aligns with Goldman Sachs’s outlook, indicating that investors with home-biased portfolios may face a disappointing decade ahead.

• Chris notes that current U.S. stock valuations are unusually high, comparable to peaks seen in 1929 and the late 1990s. Much of this valuation concentration is within the “Magnificent 7” tech companies (e.g., Apple, Microsoft). He warns that these high valuations could lead to lower forward returns, especially if earnings growth expectations don’t materialize.

• Despite robust GDP growth in the U.S., Chris explains that higher GDP does not guarantee stock market returns. Citing global studies, he highlights a weak or even negative correlation between GDP and stock returns, as high-growth countries often exhibit lower market returns over time. He emphasizes that U.S. stock market performance is more impacted by market-specific factors than national economic growth.

• Chris attributes the recent growth in the U.S. GDP largely to an expanding labor force, driven in part by immigration. However, he expects growth to slow to around 2% annually as recent restrictions on immigration reduce the labor force. This anticipated reduction in labor force growth may lead to slower economic expansion, although it could stabilize at a modestly higher level than pre-pandemic growth trends.

• The U.S. fiscal situation is perilously close to