By What a year it’s been!
Well, here we are in December, and like it or not, there’s been very little change for 2015, despite the volatility in the markets that reminded us all of the 1990s! Even though what we do as financial planners encompasses much more than investing, managing investments is one pillar of our business. This year’s ups and downs have led me to ingest large quantities of Tums, and I’ve had to explain and re-explain our overall strategy to many of you due to the market volatility we’ve faced. Quite honestly, I’m tired!
All kidding aside however, the question everyone wants to know is, “Hey Dave, when will this end? When will we see 10-12 percent returns in the stock market again?” The reality is, nobody has any idea, but there are some clues. In trying to figure out what the coming market returns will look like, let’s consider the following five points.
First, the Federal Reserve feels it must raise interest rates.
Just as we like to keep a little cash in your portfolio so we can put it to work when the markets take a downturn, the Fed wants to raise rates so that they have some room to operate should another economic event occur. Of course they’ve been saying this for years, but the reality is that we’re about to see the Fed raise rates one or two times between now and next August. These rate hikes will likely happen prior to next year’s election, as the Fed does not like to be seen as political.
Second, consider what’s going on in Europe.
Up until right now, our Federal Reserve and the European ECB have been on the same page, that is, easing rates and pumping money into their respective economies. I believe Europe will continue to print money for the next three to four years, as their economy is still several years behind the US in economic recovery. Come 2017 we will likely see a divergence in policy as Europe continues to ease, and we tighten.
Next, think about this: Historically, every time the Fed raises rates, our dollar strengthens. Every time Europe prints money, our dollar strengthens. So guess what we should expect in 2017? If you guessed a strong US dollar, have an extra Christmas cookie and a cup of hot cider!
The strong dollar has been a headwind large US conglomerates have been battling since the end of 2014, all this year, and will likely be for the foreseeable future. For these large, multinational companies – think Wal-Mart, GE or Exxon – their Wall Street earnings estimates have been revised. In addition, large companies like these can appear very expensive, as their balance sheets are being eroded by the strong dollar.
Finally, think about the rest of the world.
We have communist China with its growth issues. South America is on the verge of a currency crisis, as the strong dollar hurts these countries because most of their debt is in American dollars. So, we don’t believe the Fed can raise rates that significantly going forward.
We’re also fighting deflation as commodities prices are dropping – think energy, oil, gas, coffee and sugar! The only ones who benefit from this are you and Starbucks – but you can rest assured Starbucks won’t be passing on any of their savings to you! Of course we also have Isis to worry about, and the effects of these terrorist threats on tourism and consumerism are very real, whichever side of the pond you’re on.
As I look back at what’s transpired in 2015, I’m actually relieved that the markets aren’t down more! They’ve held together well, all things considered. That said, over the next few years, I don’t expect to see the big stock market returns we got used to after the last recession. I’m expecting muted returns, and we may need to prepare for ourselves for 4-6 percent returns in our portfolios, at best.
Keep in mind that as the Fed raises rates, it does mean the cost of mortgages, credit cards and other consumer loans will slowly rise. But, now is still a great time to buy a home, finance a car, or do some property improvements to your home. Don’t expect rates to hike significantly. And, at the same time, lower than normal energy prices should continue to put a little more cash in consumer pockets. We do expect consumer spending to be a positive theme here in the US, especially as we get into the prime Christmas shopping season!
The next couple of years are also shaping up to be great times to use the strong US dollar to your advantage and travel abroad. So head to Europe to go golfing in Ireland, or if you’re concerned about Isis, head to South America for a warmer getaway. Just watch out for the drug cartels! Or pay a visit to our Canadian neighbors to the north – but beware of black bears and mounties! Seriously though, it’s a great time to travel abroad, as your money will go further than it is sitting in that savings account earning pretty much nothing. So take that trip you’ve been putting off! And as always, let us know so we can help you plan and budget.
Article by David Smyth, CLTC, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.