I started in the Wealth Management Division about the same time Paul Volcker became chairman of the Federal Reserve (the late 1970s). It was a pretty challenging time to invest. Inflation ran in the double-digits. Interest rates were on the way up, with some short term rates eventually surpassing 20%. The stock market made no net progress for the better part of the prior decade – Business Week ran a cover story titled “The Death of Equities” in mid-1979. For several years it seemed every “buy” decision was wrong.
There was no indication that this dismal time was just in front of one of the greatest economic and market expansions in our history. Inflation was tamed, Reaganomics was introduced, and the economy roared ahead. Stock prices doubled and doubled again and again over the course of the next quarter-century. Only in hindsight did we recognize the tremendous opportunities present in both stocks and bonds when the outlook was the bleakest.
There are lessons here. One of which is, “Don’t get caught up in the moment, take the long view”. That’s particularly useful today. Interest rates are at record lows across the globe, and about one-quarter of the world’s sovereign debt carries a negative yield. Economic growth is in the doldrums here, there, and everywhere. Stock prices are at the upper reaches of historic valuations, largely because of TINA – There Is No Alternative. If shares of Coca-Cola carry a 3.2% dividend yield (with regular increases) and a ten-year U.S. Treasury Note is 1.6%, the clear choice for conservative, income-oriented investors is the stock market, correct? Well…maybe not.
The rush to yield may continue and stock valuations can climb further as more income-oriented investors join the party. At some point, though, the festivities will draw to a close. A former Federal Reserve chairman once said, “...the role of the Fed is to take away the punchbowl just as the party gets going.” The current Fed is increasingly vocal about the likelihood of higher rates over the next several quarters, but no partygoers are inching toward the exit – yet.
So what’s the “long view” today? Start with the fact that future stock and bond returns are highly dependent on valuations present at the starting point. Valuations are high today and can go higher, but some regression to the mean will take place. The combination of lofty price levels, investor complacency, and a low growth environment is not ideal. We’ll likely see higher-than-expected volatility over the intermediate term.
But keep one more point in mind, and it’s probably the most important item mentioned today. The U.S. is a resilient and strong country and its economy is the most productive in world history. It has overcome wars, depressions, and all sorts of well-meaning interference from Washington. We can always find reasons to be pessimistic – they’re in the headlines every day. But we often forget how good things are and can be going forward. Stay invested and you’ll be alright.
And, if you want an escape from the investment noise, come and see us. Together we’ll insure your focus on the “long view”.
Click below to contact our Sioux City Wealth Management Team.
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