I have always discouraged individual investors from spending any of their time on short-term market commentary and investment news. In today’s environment, that is particularly important.
Why? Among other phenomenon, the financial news media’s obsession with the Federal Reserve’s position on raising interest rates has become a complete waste of time. Yes, rates will go up, and, yes, that event will have a negative effect on bond prices. Any connection to stock prices would seem to be more psychological, and fleeting, than material. However, given the expected nominal increase, as well as the gradualism expected for future increases, this will, most likely be a non-event. Remember the Y2K thing with the computer world back in the year 2000?
As has been said by many rational observers from the investment community, including me, rising interest rates should be welcomed. Simply stated, it means that the economy is improving, which is, obviously, good in the long run for investment markets. Having solid, quality investments in your portfolio will continue to be good “holds” for many years to come.
However, it bears mentioning that the six-year bull market we have experienced will come to an end. Going forward five to ten years, things are going to be different. Investors need to be prepared for (1) continuing low inflation below historical averages, (2) lower profit margins from today’s peak levels, and (3) slower than average corporate earnings growth. All this translates into lower investment returns than we’ve come to expect. Simply stated, things will be good, but not great.
That leads me to another long-term observation. Although a confirmed “internationalist,” I have always cautioned clients about getting too excited about investing in foreign markets. In spite of the “going-global” hype from the investment community, foreign holdings represent additional risks, which I think are not well understood by some investment advisers, or much of the financial press. Unless the rewards are commensurate, why go there?
Which brings me to comment about China. Forget about the headlines related to the recent stock market crash. What happened there was just a symptom of a much larger, fundamental problem: Policy makers in China are straining for tools to address the problem of slow growth. Annual GDP increases have dropped from the 10% to 14% range for the past 15 years to forward-looking estimates of 7%. A number of respected research reports, e.g., the International Monetary Fund, are expecting 5%. Anything below a 7% GDP growth rate spells a lot of trouble for China, as well as the global economy, particularly developing country markets.
China’s intentions to move forward with political and economic reforms to improve the lifestyles of 1.4 billion people represents a monumental task. It bears mentioning that today governmental control lies with the Communist Party, which, contrary to general opinion, is not a monolithic institution. There are liberal, moderate, and conservative factions that are vying for power and influence. And, in the case of the latter, much of their interest lies in maintaining control to protect financial interests and to resist change.
The road to reform to keep billions of Chinese relatively content is going to be very difficult, and take time. During this period, the impact on international markets is going to be less than positive. Therefore, caveat emptor.