By: Michael W Arone, CFA, Chief Investment Strategist
This business requires all of us to read a lot. Like you, I appreciate the rigor of solid research, the suspense of a good plot unfolding, and the beauty of a perfect sentence. In this series called Reading the Markets, I’m excited to share my thoughts on some of the interesting ideas I discover.
No matter how clearly Chairman Powell signals the Federal Reserve’s (Fed) plans to bring inflation back to target, investors continue to obsess about how soon and how many times the Fed will cut rates this year. In fact, investors have been so preoccupied with Fed policy that they missed the economy sticking the soft landing.
Investors’ monetary policy obsession and big miss wouldn’t surprise Matt Ridley, author of The Evolution of Everything: How New Ideas Emerge. In his view, our focus on major events, such as a policy change by the Fed or the results of an election, contributes to the mistaken belief that change comes from the top down. Instead, he argues that change most often occurs “from the bottom up — when nobody is in charge.”
In The Evolution of Everything Ridley writes, if there’s “one huge mistake we all make, one blind spot,” it’s that we “assume the world is much more of a planned place than it is” where we mistakenly “credit the bystander with causing the event. A battle is won, so a general must have won it (not the malaria epidemic that debilitated the enemy army); a child learns, so a teacher must have taught her (not the books, peers and curiosity that the teacher helped her find).”
So, while a change in interest rates can impact the market, when seen through Ridley’s lens, the Fed’s policy decisions might be less consequential than the millions of decisions made each day by individual consumers.
In chapters that range from culture and technology to education and the economy, he urges readers to “see past the illusion of design, to see the emergent, unplanned, inexorable and beautiful process of change that lies underneath.”
Ridley’s explanation of Adam’s Smith’s belief that specialization and exchange drive economic prosperity clearly positions change as organic, not planned:
- The natural exchange of goods and services leads to a division of labor in which people specialize in what they’re good at doing.
- Gains result because everybody is doing what they’re most productive at.
- The resulting greater specialization intensifies the move away from self-sufficiency, leading to the production of fewer things but increased consumption.
- Specialization inevitably sparks innovation, another collaborative process driven by the exchange of ideas.
Ridley concludes that the more we trade, divide labor, and work for each other, the higher everyone’s standard of living becomes. All thanks to the “free market,” which he defines as a system of cooperation and innovation with limited government intervention and without “selfish individualism.”
Letting go of the idea that change originates at the top from institutions and individuals frees us to appreciate the power of spontaneous, organic change driven from below.
So, the next time you wonder when the Fed will cut rates or who will win the US presidential election, think too about all the smaller things — things you may be overlooking that could quietly add up to something big.
This post first appeared on June 26th 2024, SSGA Blog
PHOTO CREDIT: https://www.shutterstock.com/g/daxiao
Via SHUTTERSTOCK
Disclosure
The views expressed in this material are the views of Michael Arone through June 24, 2024, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
The S&P 500® Index is a product of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and have been licensed for use by State Street Global Advisors. S&P®, SPDR®, S&P 500®,US 500 and the 500 are trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and has been licensed for use by S&P Dow Jones Indices; and these trademarks have been licensed for use by S&P DJI and sublicensed for certain purposes by State Street Global Advisors. The fund is not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of these indices.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
