The past decade has been a difficult one for investors with volatile stock prices and economic uncertainty. At times we lived though some very frightful times going back to the Dot Com blow up and all that has happened since.
There have been many predictions for a bleak future this year and throughout history as people have predicted doom and gloom, but few of those predictions have ever come true or lasted for a significant period of time. We often forget or take for granted just how much our lives have improved and ignored this success in favor of dire predictions.
From The Rational Optimist, by Matt Ridley, “Life is getting better-and at an accelerating rate. Food availability, income, and life span are up; disease, child mortality, and violence are down-all across the globe. Thought he world is far from perfect, necessities and luxuries alike are getting cheaper; population growth is slowing; Africa is following Asia out of poverty, the Internet, the mobile phone, container shipping are enriching people’s lives as never before.” Although pessimism is currently fashionable, these facts are undeniable.
It is also undeniable that investor returns over the past dozen years have been volatile and not especially high. Yet, during this time, the value of American corporation has increased just as it has in every decade of the last century, reflecting growth in corporate earnings, cash flow and dividends. Stock prices will eventually reflect corporate earnings.
The 2013 economic outlook begins at home and it is much like it was for 2012. The biggest difference is that the general election and the tax portion of the Fiscal Cliff are behind us. The Federal Reserve is keeping interest rates artificially low for the foreseeable future. This has a ripple effect.
Low returns on CD’s, bonds and other fixed income investments make it darn near impossible for seniors to live off the interest from their investments. These low-interest rates help stocks look more attractive, especially those that pay a good dividend.
The risk/return relationship for Treasury Bonds has never been worse as Treasury Bond prices are near an all-time high and the yields are anemic. If and when yields go up, prices will drop. That may not happened any time soon as the government continues a policy that will tend to keep these rates low.
For investors seeking yield (interest) corporate, high yield and international bonds in a diverse portfolio are the best alternative. It is very important to understand the risk that all bonds investments. BOND PRICES MOVE INVERSELY TO INTEREST RATES. Prices have generally been going up for many years as interest rates have fallen, a very long “Bull Market”, this will not go on forever and prices will drop when interest rates go up.
The fund managers we use with our clients are well aware of this and minimize this risk through diversification and keeping the term to maturity of the portfolio relatively short which minimizes the volatility.
The stock markets around the world present opportunities for savvy fund managers. Many U.S. corporations have figured out how to be profitable by slashing overhead. I do not expect this trend to go away. The sad news is employment is weak and will continue to be for the foreseeable future as Obamacare is going to strangle many corporations cash flow going forward. Government interference has never been greater and the costs of doing business will decrease economic growth going forward. I do not expect consumer spending to grow much as there is not growth in employment or wage growth for those that are working to get excited about. The payroll tax went back to where it always was leaving people with two percent less in everybody’s paycheck. Healthcare costs will also go up for many individuals as well. I expect the Gross Domestic Product to grow between 1.7-2.2% this year. This is an extremely slow recovery given the depth of the recession; some would call it a “plow horse” recovery.
There are also good opportunities in both emerging and developed stock markets around the world. I feel confident that these asset classes continue to add some diversity to portfolios and should be included in most portfolios. While many people contacted me about adding gold to their portfolio in a panic due to President Obama winning re-election and what that means to fiscal responsibility, we have held off on doing that at this point. I do believe that there is a high probability that this administration will continue to borrow nearly $100 billion per month more than they have for the next four years. At some point the consequences will be felt and this is being monitored closely.
In summary, it is easy to be pessimistic when you look at some near-term issues, but we have had may issues to work through in the past and always have and this time we will as well.
Most importantly, continue to focus on allocating your assets to meet YOUR SPECIFIC FINANCIAL PLANNING GOALS. If you do not have a strong handle on what your goals are and your progress toward them you will be very susceptible to selling on emotion when the tide move s against you.
Wishing you well in 2013. Stay tuned.
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