Friday, April 29, 2016

Will Investment Returns Be Below Historical Norms

The link and graphic is to Bloomberg and a McKinsey Study.

We will be hearing more of this pessimism over the near term. The negative thinking centers on assumptions that: 1) Corporate profits having peaked; 2) Global growth will slow; 3) Interest rates will continue to be low.

In addition to the short term fluctuations in market sentiment (fear vs greed) one must also consider that there are cycles in long term market sentiment.

In my humble opinion, it is unwise to accept the assumptions in this article as having a 100% probability. My assessment is that they have a more than 50% probability of being very wrong.

Perhaps the biggest factor will be the assumption regarding global growth. While the rate may temporarily slow as excess capacity is absorbed in the short term; over the long term, the substantially growing "middle class" in developing countries has not yet come even close to the consumption levels of the average American. Energy, Health Care and Communication have potential future growth rates substantially higher than we have ever seen in the past.

Be cautiously optimistic in the long term.

Long Term Investment Returns Troubling?

Saturday, April 23, 2016

Is it a Bull, a Bear or a Bunny

The symbol of a bull supposedly indicates a rising market. The symbol of a bear indicating a falling market. The symbolism relates that a battling bull engages in conflict by raising his head and horns, while the bear uses his paws and claws to pull down.

People have attempted to predict future market returns by describing current conditions as a Bull Market (rising) or a Bear Market (falling).  A third condition is sometimes calls a "Consolidating" or "Flat" market. 

Keep in mind that assuming that current conditions will continue with "momentum" into the future is a dangerous form of cognitive bias.  It stems from the incorrect application of Newton's First Law of Motion: "Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it."

Markets are not objects. Markets are an indication of the consensus view of the likely future. And this consensus view is often strongly influenced by the very real human emotions of fear and greed.

Greed and a "fear of missing out on gains" tends to drive Bull Markets. Fear of loss tends to drive Bear Markets.  Uncertainty tends to create "Flat" Markets. A fourth type of markets could be dubbed a "Bunny Market".  A Bunny Market jumps up and down and is driven by EXTREME uncertainty. Over the longer term, the market does not rise or fall--it just fluctuates.

Arguably, we have been in a Bunny Market for at least two years. 

The EXTREME uncertainty stems, in great part from unprecedented Central Bank interference that continues all over the world. There is no historical indication of what happens when this interference ends and interest rates return to "normal".  In fact, many predict that the old normal is replaced by a new normal where interest rates and inflation will be forever low. 

What is known for sure is that if interest rates do return to the "old" normal, there will be a great deal of economic turmoil.  Governments will have to raise taxes. Durable goods like cars and homes that are often purchased with credit will become more expensive and sales volume will decline. Some businesses that rely on credit will go bankrupt or at the very least will become much less profitable. And, people who have purchased long term government bonds at low interest rates will witness a significant loss of principal. Yikes!

No wonder every word that comes out of the mouths of Central Bankers have an effect on markets.

In addition to the uncertainty about interest rates, there is the uncertainty about the growth of emerging markets--particularly China. And, then there is the issue of oil and gas prices that seem to be greatly influenced by government policy--in Iran, Saudi Arabia and Russia as well as in the USA. 

So, at no time in history, other than perhaps during the World Wars, has the global economy and markets been more reliant on government policies and politics.  

So, the best investment policy is probably (for most people) to limit your exposure to long term fixed income investments and concentrate on owning a very diversified portfolio of stocks in companies that are likely to maintain stability and profitability during times of rising interest rates and/or a slower rate of global economic growth. And, take advantage of the Bunny Market by avoiding the temptation of buying when prices are high---and by having the courage to buy when prices are low.  Be patient. Investing is about the long term.

Please be sure to read the below disclaimer--Your personal portfolio choices should only be made after a complete review and analysis of your risk tolerance and income requirements and only after a discussion with your personal financial advisor.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.