The big news right now is…
The World Economy
Slower economic growth around the world is roiling investment markets. Slower growth is causing a reduction in consumption of commodities. If we are not building or manufacturing more stuff, we will use less petroleum, iron, wood, copper etc. So countries that put out a lot of natural resources like Australia, Brazil, and Russia are feeling the pain of slower growth in China. Over the long term maybe we will not use up everything on the planet as fast as we thought.
For some reason, Saudi Arabia is pouring out tons of cheap oil into the energy markets which is holding the price down. I expect they will not be able to do this for more than another year. Since the world has developed so much new oil supply with better technology, I would expect the rebound in energy prices to be less dramatic than we have seen in the past.
The US Economy
Things may look but, unlike in 2007-2009 our economic underpinnings are not bad, they are only just a little bit good. In 2007 the economic conditions were terrible. So I think that our bounce-back from this will be pretty decent.
Employment numbers are good. Businesses are doing well enough. There is a give and take between consumers spending their money as opposed to saving it. Consumer spending has been coming back but stalled a bit recently in favor of savings. Consumer spending is good for corporations, but can be a negative for households that should actually be saving and paying down debt.
Low energy prices are contributing to financial strength at the consumer level – more money to save or spend on other things. Low gas and oil prices could contribute to inflation being too low, or negative, which can cause people to freeze their spending in favor of waiting for a lower price.
Investment rates of return are going to be more difficult to come by in the future. There is an ongoing squeeze between interest rates and growth around the world. In order to attempt to get better rates of return, taking more risk will be necessary.
The strategy I have been using for 21 years is “Modern Portfolio Theory” – diversifying among low correlation asset classes, and rebalancing with the ups and downs. This has proven to be a solid long term strategy that helps people avoid constantly selling at a loss by reacting to the headlines. Since we cannot accurately predict which asset classes will do well in any given year, it still makes sense to stay diversified and to rebalance periodically.
Earning Investment Returns
For the near term, I am looking to add to high yield bonds and small and mid-size company stocks. For the long term, I am still looking to rebalance into Emerging Markets stocks and into Commodities, but I am not in a rush on those yet.
Healthcare and biotech stocks are likely to be very good opportunities for a very long time. Financial stocks are probably mostly good investments going forward for a number of years as well.
I feel that ordinary large company stocks will run with very ordinary (plain, dull) rates of returns for at least a few years. I am hoping for 5 to 7% rates of return over the next few years.
At the safety end of investing, lower yielding bonds (such as short term high grade bonds) should be producing 1% to 3% returns, but will improve as interest rates rise.
Peter J Canniff, CFP® professional