Stalemate Investing, Positively

January 15, 2020 - John Osbon (3 mins to read)

Most years start the same way. Investors look closely at the price action during the first day, week or month of the new year. No matter which way investments go, price action in the first month is a poor indicator of future returns. Then there are politics, threats of violence around the world, and earnings reports to consider. Declaring an investing stalemate and doing nothing or going to cash seems like a good idea. It is NOT a good idea and here’s why.

Positive #1 -The expansion is comparatively young

Professionals like to point out how long our economic expansion has gone on in the US and that it is likely to end very soon as a result of its age. It’s worth reminding everyone that there was a 19-year economic expansion in the US from 1982 to 2001 with a very brief pause because of the first Gulf War. This expansion (at 10 years) is only half as long as that one, and could go on for some time. It could even set a new record and end in the next decade, after 2030. Imagine that scenario, and allow for it among your investments.

Positive #2 – Interest rates are low

Over the last decade we have all predicted that interest rates are going up and that inflation is going up, too. And we have all been wrong. Interest rates have not gone up in the developed world. Mortgage rates are so low here (3.5% for 30 years) that investors have been buying real estate or borrowing more than they need because their liquid returns are well above the cost of borrowing. Data seekers don’t like to go back more than 50 or 100 years because the global economy has changed so much and technology has sped up the economic pace. Longer term, however, there are examples of no inflation for 50 years, even during periods of innovation and economic growth.

In some places like Europe rates have gone below zero, creating big investment problems. For diversified investors or those living off fixed income these low or negative rates have been a big problem. There is no sign that rates or inflation are going up. Household leverage is back to 2004 levels and stable, as are mortgage delinquencies. Imagine if interest rates don’t go up for 10 years and invest a portion of your portfolio accordingly.

Positive #3 Valuations are reasonable

You can pick any market around the world and cite historical evidence that investments there are overvalued, stretched or heading for a fall. That perspective has also been around for at least ten years and is still being promoted. But very few markets, aside from small ones, have had any kind of sustained fall. And earnings and dividends have been growing worldwide the entire time because of a growing global economy. Valuations are reasonable, especially in Europe. Dividends are higher there, too. A period of reasonable valuation can go on for a long time, perhaps another decade.

Next step on your checklist

I have listed three reasons why you can invest through a market stalemate like we face in January 2020. Investments and portfolios today should be positioned for the next two to three years in an expanding, low rate, reasonably priced environment. You can contact us directly to see how we are doing it.



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