The simple answer to this question is, no one knows. And trying to make good long-term investment decisions based upon what you may think is going to happen is foolhardy, as the cost of being wrong is usually greater than the benefit of being right. The goal of a long-term investment strategy is to position your portfolio so that you can enjoy some benefits if the markets move in your favor and so that you don’t get hurt too badly if markets move against you.
At the present time it is particularly hard to get a feel for what is on the horizon. There are signs that the U.S. economy is doing well and that should be good for the U.S. stock market. On the other hand, if interest rates increase to a point where investors can actually earn some return investing in fixed income, we believe there is a lot of money invested in stocks right now to get some return that really belongs invested in fixed income and will return there when rates increase. Decreased demand for stocks should push their price down. The strong U.S. dollar versus foreign currencies – and particularly the euro – should be negative for U.S. stocks as it makes domestically produced goods more expensive abroad and makes foreign-produced goods cheaper in the U.S.
It seems as if the international markets, which have been lagging the U.S. for the past few years, should be in a position to break out with the governmental stimulus that is being provided to those economies. But the scepter of problems with Greece, the possible “Grexit” (Greece exiting the euro currency) and concern about contagion to other challenged European economies casts a pall on what might otherwise be a pretty optimistic outlook for foreign stocks.
Is the period of historically low-interest rates on fixed income investments nearing an end? Many say so and wait with bated breath for the first decision by the Federal Reserve to increase rates. However, within the past few weeks we’ve seen rates on the 10 year U.S. Treasury bond rise to almost 2.5% – leading many to think the inevitable increase was here – only to see rates fall back to 2.2%. Despite all of the thought that rates in the U.S. will rise and the rise is imminent, we are concerned that the rates on U.S. sovereign debt are actually higher than the rates offered on any other developed country sovereign debt. This could lead to a world-wide demand for U.S. government debt which would counteract any efforts by the Fed to increase rates, causing them to remain low for some time yet.
The goal of prudent long-term management is not to correctly guess which scenario will play out, but rather to position your portfolio so you can benefit if markets go up without getting hurt too badly if they do not. That is what we continue to strive for in our work for you.