Flat Markets And Slow Growth Very Likely Short-Term
Investment Perspectives: Q4, 2021
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Todd Sixt is the CEO of Strait & Sound. He is a successful and seasoned leader of financial service teams. His focus is to ensure Strait & Sound’s clients are provided with a first-class experience and that the work delivered by our people is unsurpassed in the financial services industry. At his core, he believes in excellence.
Is this a Rip Van Winkle market? In 1819, Washington Irving published a short story about Rip Van Winkle, a man who fell asleep for 20 years and missed the entire Revolutionary War. What might you miss if you fell asleep for the next 2 years or so? I don’t think it would be anything quite so dramatic as the Revolutionary War. In fact, I would postulate that you wouldn’t miss much, especially in the markets.
Sleep is probably a pretty good metaphor to describe the coming period. Those of us who have raised children have likely witnessed something similar. When a bouncing and vibrant child suddenly starts sleeping many more hours than we’re used to seeing, we tell ourselves—they’re getting ready to grow. They often wake up hungry, sleep some more and then eat again. Within a short time of the eat-sleep-eat cycle, we seen them hit a growth spurt before our very eyes. It’s truly amazing.
While I don’t have a crystal ball that allows me to predict the future, I do have market indicators and a history of market events that demonstrate cyclical patterns. Economists might very well describe the period we are entering as Consolidation. Bull markets surge forward. Bear markets lurch backward. But Consolidation markets do neither—to any significant degree. During Consolidation, markets often trade within a defined range. How might this period impact you and your family?
Over the next couple of years, I expect to see slow market growth, nominal inflation, unemployment slowly going down and a raft of nervous investors wondering where to put their money to see better than market average rates of return. So, what do I recommend for periods of Consolidation? Now more than ever, you really need to focus on your financial plan.
My Take On Market Dynamics For The Next Couple Of Years
Many of today’s investors have grown accustomed to seeing attractive rates of return consistently, year-after-year, with limited periods of volatility. They also may be preconditioned to believe that a post-Covid surge should drive markets up. I’m not convinced that either of these expectations are realistic for the period we are entering. Why do I say this?
- Valuations. These are already pretty strong for many publicly traded companies. Is it realistic to think that they can go even higher, given everything else the markets are contending with? I’m not convinced of that. For example, five years ago (November of 2016) Microsoft was trading at around $60. Today it’s trading in the $300 range. Unless the company puts forward some ground-breaking new technology or acquires another notable company, I see little that warrants a valuation surge. My sense is that this will be true for many publicly traded companies. Will there be exceptions? Of course, but sound financial plans are not built around exceptions. They’re built around reasonable projections of average rates of return.
- COVID. The one X factor that could shake up market Consolidation is COVID. If a COVID resurgence shuts down the economy again (which seems unlikely), we might see a short dip. But it seems unlikely to me that this will be long-lasting or economically devastating. The full-scale COVID shutdown in 2020 did not have a long-lasting effect, for instance, on the Dow Jones Industrial Average. At its low point, March 20 of 2020, the Dow was trading at 19,178. As of the drafting of this article, the Dow is trading at around 35,000. If anything, I predict that the slowly dissipating effects of COVID will have a slowly dissipating effect on the markets.
- Inflation, Interest Rates & Government Spending. I see these three as dance partners that will counter each other’s moves. Inflation will try to drive markets down. Steady interest rates will hold the line. Government spending, particularly in some form of an infrastructure package, will buoy the markets. Government spending could tip the scales toward faster growth and market resurgence. But this is not a certainty, especially given neither party has a clear mandate or enough votes to pass legislation easily.
- Crash Concerns. Some investors may be concerned about the bubble bursting or some other form of serious market correction. While this is a possibility, I see little to suggest that it will have a material impact on the markets over the next several quarters. FDR famously said that “the only thing we have to fear is fear itself.” I think that is an apropos assessment of today’s market. Fear could create some sort of downward momentum at some point in the near future. But overall market fundamentals remain pretty strong, so I don’t foresee a correction having a long-term negative impact on investors.
While any of these factors could produce market swings, it seems far more likely to me that the next 12-24 months will be primarily flat. Before I discuss what we recommend to clients for flat markets, let me reflect a bit on two approaches to investing so you understand why we make these recommendations.