Personal Implications of Current Financial Markets

  • August 20, 2015

First, from a recent Investment News article:

There are times when expectations don’t square well with reality. Today, the expectations many investors have baked into their financial plans for the future are based upon recent or historic returns. But the reality is that we are likely to be entering a protracted period of abnormally low portfolio returns, and relatively few investors are prepared for it.

Interest rates are low, inflation is low, equity valuations are high, debt levels are high and the monetary and fiscal tools governments use to stimulate growth are fully deployed. We are operating in a global investment environment that many money managers and market analysts are calling the most challenging they have observed in their careers.

Jack Welch famously called upon business leaders to “face reality as it is, not as it was or as you wish it to be.”

You can read that full article here.

Now, from a quarterly update by one of the larger providers of ETFs – ProShares – and its 2Q 2015 Market Observations:

Equities – U.S. stock markets were essentially flat for the second quarter, driven mostly by macro events. International developed markets posted modest returns, benefiting from continued monetary accommodation and expectations for moderate economic growth.

Bonds – Interest rates rose across the yield curve (meaning bond investments lost value) during the second quarter, with the U.S. Treasure curve steepening as moderate economic growth persisted. Credit spreads widened as interest rates rose, hurting corporate bond prices.

Alternatives – Alternatives had mixed performance during the second quarter. Breakeven inflation and listed private equity posted solid results, while managed futures and global infrastructure were among the negative performers.

If one was to read the daily reports from major financial news outlets-like those above-it would lead you to believe that crisis type volatility is back and markets are swinging in a wide range these days.

Not so.

Lately we have seen constant movement (in stocks) within a swath that is about 4% top to bottom. This is approximately one third of the historical norm.

What’s going on? My take is that financial markets are digesting the very nice movements of the past several years. The markets are allowing for population growth, job growth and a Federal Reserve that wants to be as accommodative as possible to take corporate earnings slowly to the next level up.

This is not all bad news, but it is not the environment which typically leads to spectacular returns.

So what does all of this mean to the average family?  Simply that we all must (1) save more, (2) plan for lower returns for a while yet and (3) avoid basing plans for our financial futures on return projections that are entirely backward-looking.


Investment Insights by Mike Jones