The eighth annual Morningstar ETF Conference was held on 6-8 September in Chicago. The three-day event brought together more than 800 advisors, strategists, due-diligence analysts, exchange-traded fund providers, and a host of other industry participants. As is the case with all Morningstar conferences, this is not a pay-to-play affair chock a block with product pitches. Our analysts craft each year’s agenda. We set out to put together a solid lineup of industry luminaries to spur good conversation about important issues facing investors, as well as to give them practical ideas about how to put ETFs to work in practice. I think this year’s conference was our best yet. I’d like to share with you my top three take-aways from the event.
The Changing Nature of Work
Joe Davis, Vanguard’s global chief economist, delivered this year’s keynote. Davis shared three paradoxes that define the current state of the global economy and markets. Specifically, he stated we are living through a period marked by low inflation, but full employment; low growth, but high valuations; and low volatility, but high uncertainty. While low growth, in particular, would typically be indicative of a stagnating economy, Davis argues that under the surface the economy is being propelled forward by major technological advances.
Davis believes the effects of ongoing technological innovation won’t be adequately captured by traditional statistics like gross domestic product growth, and their direction and pace certainly won’t be influenced by the factors most investors are fretting over, such as Fed policy. Rather, they will manifest in perceptible changes in productivity and prosperity. He shared an anecdote from his own family’s experience, saying his grandmother could measure advances in her family’s well-being in increments of the things they could afford (the number of times they could serve meat at dinner in a week) and the opportunities available to them (for example, the fact that they could afford post-secondary education for their children).
The title of Davis’ presentation was “The Trend That Will Define Our Lifetime.” According to him, the trend that will define our lifetime is the changing nature of work. The interplay between human capital and technology will continue to evolve. Though many headlines paint a grim picture of our prospects, as humans forfeit more tasks to machines, Davis’ view is more sanguine. He believes that as more-mundane tasks are tackled by technology, we will allocate more of our time to those tasks that are advanced and uniquely human. In doing so, we will have to further hone our ability to think creatively, to embrace and learn to leverage technology, and to bolster our emotional intelligence in order to better relate to others and build and manage teams. Lifelong learning will also become the norm. Davis shared that he himself had enrolled in a handful of online courses recently to continue to bolster his skill set.
Davis stressed that this transition will not be painless. He estimates that up to 20% of the jobs that exist today could be eliminated by technology. But over the longer term he expects these losses would be more than recouped as new jobs related to developing and leveraging new technologies fill the void.
This tech-led transition could give rise to four new paradoxes. More automation could actually result in labor shortages. As the current workforce ages and aggregate demand remains stable, fewer workers and solid demand could actually offset any job losses stemming from automation. The second potential paradox is a market where labor is in short supply with low inflation. While labor shortages could result in wage pressure, further advances in technology will likely have an opposing effect on prices as the cost of technology declines. The third paradox is a pairing of low inflation and higher real interest rates. This scenario could very well arise in the event of steady productivity gains, said Davis. The fourth and final paradox is the juxtaposition of higher real rates and lower short-term market returns. Davis believes there is more risk in the stock market than fixed-income markets today as equity valuations are stretched and further interest-rate increases look to be on hold for the time being.
My Take-Away
Embrace technology. Never stop learning. I admittedly have Luddite tendencies that have likely impeded my personal and professional growth at times. Rather than shunning new technology, we should embrace it, especially if we can leverage it in ways that help us to continue to learn and build our skill sets (online courses are a perfect example). As our final general session speaker, PIMCO’s Jamil Baz, shared, our biggest asset is the one between our ears: our human capital.
In part 2 of this article, I will talk through the remaining two takeaways.
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