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January 9, 2013
AllNews
Financial markets did very well in 2012, with stocks returning 16%-18%, which is significantly above long-term averages. During the fourth quarter markets seemed to cling to an assumption that the fiscal cliff would be averted, or at least end in something less than a catastrophe. Domestic stocks ended the quarter very close to where they started, despite a bumpy ride on the hopes and fears related to the fiscal cliff and other issues. International stocks, on the other hand, had a great quarter as bad news about the Euro crisis gave way to cautious optimism. So after lagging for the first three quarters of the year, international stocks’ 2012 performance slightly exceeded that of the broad U.S. market.
Bonds had another surprising year, showing that low interest rates can go even lower. The broad bond market had returns exceeding 4% with yields under 2%, meaning bond values appreciated as rates came down. Someday this process will reverse itself. When interest rates rise, depreciating bond values will easily overwhelm low yields producing negative bond market returns. A reasonable predictor of bond market returns over the next decade is the current interest yield, making 2% annualized returns a realistic expectation.
Balancing the Doom and Gloom
Stories about a “new normal” and near-zero growth expectations for the U.S. economy have circulated widely in the financial press. Some of these stories are based on complicated economic analyses, but many, in the end, extrapolate our recent experience and conclude that our economic future will be disappointing.
If we are really in so much trouble, why does the market not reflect this expectation of gloom? The media loves doom and gloom. In fact “good news” seldom makes the news. Unless it is coverage of SU’s bowl victory, or Coach Boeheim’s 900th win, the 11 o’clock news is generally about things we wish never to happen.
So to provide some balance, I am pleased to report that at least a few people hold contrary viewpoints.
In a recent article, Laurence B. Siegel writes, “We have heard concerns about the permanent slowing or stopping of global growth after every depression or severe recession. In the 1890s, the idea was circulated that everything worth inventing had already been invented. In the 1930s, it was popular to say that capitalism had created the mechanism of its own destruction. In the 1970s, concerns focused on foreign competition and resource constraints, and some people forecast mass starvation. Today’s concerns are no different in principle, and they are no more realistic.”
In a video and transcript recently posted by Vanguard Chief Economist Joe Davis, he makes a strong case for optimism about the future (https://advisors.vanguard.com/VGApp/iip/site/advisor/research/article/ArticleTemplate.xhtml?iigbundle=IWE_VideoEcoOutlook&oeaut=TsqRFpiuAY). In a theme shared with the Siegel article, he talks about the three industrial revolutions experienced in the U.S. The first started with the invention of the steam engine, which changed manufacturing and revolutionized transportation. The second started with the invention of the light bulb, which led to wide-ranging innovations that revolutionized many aspects of American life. The third revolution he attributes to the invention of the microprocessor in the early 1970s.
As happened in the first two industrial revolutions, Davis argues that we are now in a lull of the third, which is likely to be followed by a resurgence of innovation and investment, based on the global application of still evolving technology. He makes a strong argument for optimism.
We could experience more of the recent past, with sluggish growth and high unemployment, or we could see a return to more normal growth rates, driven by innovation and investment as suggested by Joe Davis. Neither scenario is certain. When markets seem inconsistent with the drumbeat of media, remember to listen for the whispered viewpoint of the contrarian. The future is never certain, but the better we can understand that a range of outcomes is possible, the less likely we are to be caught by surprise, and be unprepared for a future that is different than the recent past.
If you’re ready to start planning for a brighter financial future, Rockbridge is ready with the advice you need to achieve your goals.