DOES IT GET ANY BETTER THAN THIS?
Companies are reporting record profits, asset classes are hitting new highs, unemployment is low, and the Fed still has the pedal to the metal — does it get any better than this?
THE ISSUE TODAY
Stocks, bonds, real estate, you name it—almost every asset class is hitting new highs. At first blush, it doesn’t make any sense…until we realize that the Fed (the U.S. Federal Reserve) is to thank — or to blame — depending on how you look at it. Aside from keeping interest rates low, which helps incent companies and consumers to spend and invest, the Fed is also tamping down concerns about inflation by dismissing it as “transitory.” Even more, they’re still purchasing $120 billion of assets each month, effectively drenching the economy with liquidity.
All told, the Fed’s balance sheet has grown to $8.1 trillion and investors are right to be concerned….not because we have too much debt but because if this is the accommodative policy of the Fed when the economy is roaring, what will they do—or what will they be able to do—when the economy eventually slips?
In a recent speech to the Student Investment Fund at the University of Southern California, famed investor Stanley Druckenmiller said, “I believe we are in the most unique set of economic circumstances that I’ve seen in my career…and certainly in the post-war period.” These are indeed unique times and I’m concerned that wall street and main street alike are suffering from cognitive dissonance.
WHAT INVESTORS CAN DO
Very few investors can predict the future with any consistency, and it’s my view that trying to do so is a fool’s errand. I often say that if we can’t predict we should prepare — so what can we do in this environment?
From a portfolio and investment perspective, let time horizon—and risk tolerance—be the primary considerations. If you’re a short term investor and require your principal back in the next 3-5 years, you’re probably wise to bite the inflation bullet (and the low interest rate bullet while you’re at it) and leave your funds in a FDIC insured account. But if your time horizon exceeds 5 years, then exposure to global equities and global real assets (e.g. real estate) likely make sense given the potential for higher inflation, shifting currency valuations, and higher rates.
We’ve gone almost a year without a 10% market correction and so it’s likely a matter of when not if we see a meaningful pullback. And while savings accounts and money market funds pay next to nothing, I’d encourage investors to maintain ample cash for a rainy day and potential buying opportunities.
But perhaps the single best thing investors can do in this environment —even beyond portfolio positioning—is to update their planning projections to incorporate realistic, real return (after inflation) estimates as rates continue to remain low and inflation persists. In other words, let’s not expect the future to look like the immediate past.
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