Volatility is the new normal

Michal Katz
Michal Katz Head of Investment and Corporate Banking, Mizuho Americas
October 6, 2022

This article was originally published in Forbes.

The last few years have been a whirlwind. Those hoping for calm going forward may be sorely disappointed. Technological advancements, always-on connectivity and real-time user expectations have shortened innovation cycles, delivery times of products and information and social interaction. This acceleration has been accompanied by volatility and uncertainty across macro analysis, markets, work and social engagements.

Through 2021, we saw the Dow Jones over 36,000, workplace and supply chain upheavals spurred by a global pandemic, unemployment, inflation and interest rates hovering near historic lows. We saw the digitalization of nearly every aspect of our lives. Now, with 40-year high inflation, tight labor markets, tightening monetary policy and the specter of a recession, consumers, corporations and investors alike are experiencing a new playing field. Finding a new equilibrium may take time, and developments across sectors tell us volatility may be the new normal.

Look no further than the capital markets. The first six months of 2022 have been the worst they have seen since the early 1970s, erasing returns gained since the pandemic’s trough. With rising interest rates and the elimination of pandemic fiscal programs, investor sentiment has shifted to risk-off mode. While the S&P P/E ratio—a classic measure of the benchmark’s valuation—has pulled back, it remains above historical trends and has yet to reflect a revised denominator as corporate earnings contend with slower growth and rising costs of operation.

The changing environment has dampened enthusiasm for financing and deal-making after smashing records in 2021. Per Dealogic, in the first half of 2022, M&A deal activity for corporate and financial sponsors is down over 30%, and new issue activity is down 83% in equities and 77% in high yield bonds compared to last year.

On the private side, recent communications from venture capital firms tell us they’re once again selecting winners and losers, asking portfolio companies to preserve cash and cut costs with down rounds. Companies should view this reset as a constructive opportunity to focus on core competencies, shed off underperforming projects, and drive operational efficiencies to deliver value to stakeholders. This shift in focus will prime them for the inevitable point when markets open up yet again for high-quality companies with patience and discipline.

Perhaps one of the most underappreciated shifts in recent years has been the declining faith in globalization. Globe-spanning supply chains are now being reevaluated, though they won’t be shifted overnight. The pandemic, armed conflicts and other events have initiated a larger conversation about globalization and the potential vulnerabilities that come with it. To ensure resilience and counter unpredictable blunts to the supply chain, companies should look to establish vendor redundancies, diversify their geographic footprint and consider reshoring of critical resources and infrastructure.

Trends in the workforce are also shifting. Over the past few years, even during the challenges of Covid, the labor market has been a mostly positive story. Despite a surge in unemployment to 14.7% at the onset, just 18 months later the jobless rate had returned to 5%. The tight labor market has led to rising wages and put more leverage in the hands of employees.

We have even seen an uptick in unionization, including at companies like Starbucks and Amazon. But now cracks are beginning to appear. Netflix, Microsoft and others in tech have announced layoffs recently, while other companies are instituting hiring freezes and rescinding job offers. And while the pandemic demonstrated many firms can make remote work happen, there could be a reset as more companies encounter choppier economic seas.

For many companies, it could make sense to embrace hybrid models that maintain a degree of flexibility while encouraging employees to be back in the office for ad hoc ideation, necessary work interaction, social engagement and culture building. The prospect of a recession, pressure on corporate earnings and high inflation could even the playing field between employees and employers.

The rebalancing is occurring rapidly on the societal front as well. People are breaking away from pandemic-era health practices. In-person gatherings have returned, travel is back and the predicted exodus from cities turned out to be temporary. That said, we are not returning to the status quo.

Increasingly, people are craving authentic experiences on their terms across all aspects of their lives, whether it be at the office or on the web. Companies should consider, and perhaps leverage, these shifts in how they recruit and retain top talent, purposefully interact when gathering in person and embrace the pandemic-era benefits of productivity and flexibility.

All signs point to a turbulent world in the years to come. The upheavals resulting from Covid and shifts in geopolitical power are altering the prevailing economic and social winds of our world. The search for a new equilibrium will have dramatic effects—from capital markets to globalization to the ways we work and engage with one another. This environment will reward companies, investors and consumers who are agile, flexible and resilient. Those who are not may be left fluttering in the tempest.

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