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Tips On Survival From The Queen Who Excelled At It

Discipline, patience and a certain passivity paid off. Investors might take heed.

The biggest crisis in recent years. Photograph: Bloomberg
The biggest crisis in recent years. Photograph: Bloomberg

Survival Tips

Normally, this section of Point of Return closes the newsletter. Not today. If there was ever a great survivor, it was Elizabeth II, who has passed away after seven decades as Queen of England. The economy and markets transformed beyond recognition during her reign, and so did the role her nation played in the world. Instinctively, much of the English-speaking world is voluntarily coming to a halt. For the overwhelming majority of Britons who have known only her reign, there is a sense of unreality.

Survival wasn’t a given. The British love tradition, but a hereditary monarchy is quite an anachronism. And on at least two occasions during the last 70 years, it looked as though the monarchy was endangered: in 1992, when the public revolted at the idea that the repairs Windsor Castle needed after a fire should be paid by the public purse, and the royal family soon had to consent to pay tax for the first time; and again in 1997, when grief at the death of Princess Diana and the Queen’s long delay before addressing the people about it led to fierce criticism. 

Yet somehow she recovered, as did the institution. How did the Queen survive, and how did she enable the monarchy to survive?

Perhaps there are two key intuitions. The first was to move with the times and adapt to the changing culture around her. Ten years ago, this reached its peak when the Queen agreed to take part in a skit for the opening of the London Olympics. James Bond, played by Daniel Craig, arrived at Buckingham Palace to escort her to the stadium, which they entered on parachute from a helicopter. (Well, stunt doubles did it for them.) This was symbolic of the new Britain that those Olympics were meant to showcase to the world — an open and inclusive society, at peace with the loss of its global hegemonic status, and happy to rejoice in its outsized contribution to global culture. Where Britain was once about its navy and control of far-flung colonies, the national identity came to focus on the likes of Shakespeare, the Beatles, and James Bond. By taking part, the Queen showed that she had a sense of humor, and gave some validation for a new notion of a self-confident Britain happy in its own skin and prepared to laugh at itself. 

The second was to stay deliberately above the political fray. This might seem to be mere passivity, in an environment where the exercise of royal power would plainly lead to resistance. But in many ways it enabled Britain’s unwritten constitution, built on trust in evolving institutions but without any formal rules, to survive. The monarch was still there, and the ultimate British institution remained as a validator for others that were changing fast. There was no constitutional rule that required the monarch to practice this self-denying ordinance. But by taking the line that she did, she allowed Britain’s set of rules to endure.That approach helped to ease the most serious constitutional crisis of recent years, when Boris Johnson started his premiership by asking the sovereign to prorogue parliament for a month, a move that would have effectively made it impossible for MPs to thwart Brexit. This power still rests with the monarch, and a deputation of ministers headed to Balmoral to ask for approval. Johnson’s plan soon fell apart as MPs mustered in opposition. The sense that he had disrespected the Queen, as a person, helped turn the public against the idea. She agreed to the prorogation, but her role helped democratically elected politicians to thwart what would have been a profoundly anti-democratic step.

The biggest crisis in recent years.Photograph: Bloomberg
The biggest crisis in recent years.Photograph: Bloomberg

The Queen became a touchstone of emerging culture, even among those who disliked the monarchy. One of the biggest rock bands of her reign took her name in vain: Queen. The Sex Pistols launched the entire punk revolution (and another wave of British domination) by playing God Save the Queen (she ain’t no human bein’) — later covered by another great British institution, Lemmy and Motorhead. And the great 1980s band The Smiths released a seminal album called The Queen Is Dead. Their song Nowhere Fast includes the immortal lyrics: “I'd like to drop my trousers to the queen/Every sensible child will know what this means.” But even if she was a sounding board for discontent, she never became a figure of ridicule like others in her family.

What tips might she have had for future survival? The potential problems are legion. Barbados’ decision to become a republic may yet set a precedent for other former colonies to rid themselves of the anachronism of keeping the Queen of England as their head of state. The United Kingdom is threatening to tear itself apart, as the contradictions of devolution to Wales and Scotland, and the ructions Brexit caused for the status of Northern Ireland, all put the unwritten constitution under extreme pressure. The personal authority and the sense of loyalty to her as a person will be hard to replace. 

The constitutional issues grow thornier for King Charles, who lacks her accumulated goodwill. The outcome of the prorogation episode was, arguably, that the monarch would have been entitled to say no to the request to close parliament. But it might be difficult for Charles or his successors to do such a thing when they lack her personal authority. And the intensity with which politicians are currently testing Britain’s institutions suggests that there are more constitutional dilemmas ahead.

She’ll have taught her son plenty of things.Photographer: Max Mumby/Indigo/Getty
She’ll have taught her son plenty of things.Photographer: Max Mumby/Indigo/Getty

A final issue for Charles concerns democratic legitimacy. A hereditary monarchy is indefensible, but under his mother it was always clear that if the question had ever been put to the people in a referendum, the status quo would have won in a landslide. Even if democratically elected, Elizabeth plainly enjoyed the consent of the governed. That might not hold true in the future. But the mere idea of trying to work out an alternative to the monarchy suggests a much bigger mess even than the one caused by Brexit. 

The Queen doubtless gave her eldest son plenty of survival tips before she passed. The most useful might have been on the virtues of consistency, patience, and a preparedness to let the country around her change. If there is any question over how important her role became, look only at the reaction to her passing — those old-fashioned virtues made her much loved. 

Regal Investment

Meanwhile, to return to the usual subject of Points of Return,  those virtues would also have helped in investment. The main stock market index quoted in the UK at her accession, the FT-30, is no longer regularly calculated and published — but using the widely respected indexes kept by Elroy Dimson, Paul Marsh and Mike Staunton, the British stock market multiplied more than 2,500-fold during her reign. This wasn’t as good as in other stock markets such as the US, but it was still well ahead of inflation, with price levels multiplying only about 20-fold over the same period. British stocks did fine during her seven decades, and there’s no need to worry about the fact that others did even better.

Keep going for as long as 70 years, and investments are generally able to come good. As with the Queen herself, investors would have found that discipline, patience and a certain passivity would have paid off. 

Profits of Doom

What have we got to be afraid of? A myriad of factors pose threats to US equities, from sky-high inflation to hawkish central banks and looming geopolitical risks. But corporate earnings — which are what you buy when you buy a share — could ultimately be far more important. They boosted the stock market over the summer when results held up better than feared for the second quarter. But profit forecasts for the third quarter now approaching its end are dipping sharply. It’s usual for this to happen as companies try to talk down expectations but, as this chart from Jonathan Golub of Credit Suisse Group SA shows, the dip in the last few weeks has been far worse than the average:

S&P 500 earnings estimates for 2023 have also been falling in recent weeks, according to a Sept. 2 note published by Bloomberg Intelligence’s Wendy Soong. For this year, she expects S&P 500 earnings-per-share to be at $226.50 down 0.7% from peak, while S&P 500 EPS for next year has taken a bigger hit to stand now at $240.80, down 3.3% from the midsummer peak:

The picture looks worse if the earnings of energy companies (massively boosted by the high oil price this year) are excluded. Andrew Lapthorne, chief quantitative strategist at Societe Generale SA, juxtaposes the course of earnings expectations with and without energy in these charts — note how different the scales on the axes are: 

Earnings are related to the economic cycle, but not tightly, and expectations for next year are intertwined with macroeconomic concerns about the risk of a recession. Historically, the S&P 500 has experienced an earnings recession (two consecutive quarters of year-on-year earnings declines) in each of the periods after a three-month/10-year yield curve inversion, according to Bel Air Investment Advisors strategists including Carl Ludwigson, Richard Ratner and Craig Brothers. This is also regarded as the clearest bond market indicator that a recession is coming, and that curve did invert for a matter of hours last month.

However, earnings expectations are holding up a little too well to be consistent with an imminent recession. To quote Golub: 

Put differently, the revisions of the last few weeks are a “far cry from the punch in the gut” that many were anticipating, Liz Young, head of investment strategy at SoFi, said. With the benchmark index falling as much as 24% peak-to-trough, worse had been priced in. And beyond that, record high profit margins provide a cushion. She said that it was the larger downward revisions seen ahead of prior recessionary periods that concern her, especially when paired with a bear market — and this implies that the falling expectations for 2023 are more significant:

Anthony Saglimbene, chief market strategist at Ameriprise Financial Inc., shares this sentiment and suspects that next year’s estimates have stayed too high for too long. Here’s more from him: 

When next year comes and analysts turn out to be too optimistic, which they often are, he added, these estimates will have to come. And if they turn outright negative, that will be a problem.

The issue gets trickier when earnings are reduced to their components — revenues and the profit margins extracted from them. Revenue growth has stayed at a constant of about 8% (outside of the energy sector), while margin growth has gone negative, as Lapthorne of SocGen demonstrates in the following chart. Tighter margins can probably be attributed more to rising wages than anything else. But if revenues keep growing like this (and they should, because nominal revenues tend to rise with inflation), it becomes much easier to ride out any squeeze on margins from revitalized union activity:

The Street continues to assume that margins are going to tighten a lot. This is seen as happening across all sectors apart from energy and real estate. Yardeni Research Inc. suggests that industry analysts covering the S&P 500 may trim profit margin estimates further until they get another round of guidance from company managements for the third quarter, starting in mid-October. “Analysts remain mostly bullish on S&P 500 revenues in part because they go up along with inflation. Furthermore, very few industries (such as the S&P 500 Homebuilding) are showing signs of falling into a recession currently,” the firm said. 

The chart below shows downward revisions in nine of the 11 sectors in the S&P 500, with only energy and real estate margins being adjusted higher. Still, the firm isn’t expecting margin estimates to fall much further this year so long as there’s no economy-wide recession.

Depending on what corporations say next month, and developments in the economy, it’s still possible to construct a moderately bullish case for earnings. Doug Peta, chief US investment strategist at BCA Research, puts it together in two parts. First, the extent of the pandemic-era boost to consumers’ incomes has led consumption to be very resilient. That in turn implies that revenues can keep growing:

Second, he suggests that the margin squeeze needn’t be as bad as expected because labor’s negotiating power, while strengthening, is doing so from a historically weak position. Labor should be able to extract a bit more from capital, on his argument — but there is a long way to go before unions regain the power they had before President Ronald Reagan took on and defeated the air traffic controllers in 1981:

There’s an economic case, then, that an earnings recession can be avoided. Stronger wage gains or a serious hit to consumption would damage that case. For now, Wall Street analysts are hedging their bets, reducing estimates while still projecting positive growth. As in so many other things, that leaves the stock market highly leveraged to the economy. 

— More From Other Writers at Bloomberg Opinion:

  • Adrian Wooldridge on the Revolutionary Monarchy of Elizabeth II
  • Therese Raphael offers An Elegy to the Queen From an American in London
  • Martin Ivens asked (in March this year): Is Time Up for the British Monarchy? His Answer: Not So Fast

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of “The Fearful Rise of Markets.”

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