What to Expect from 2010
Whether you call it a slow recovery, a jobless recovery, or something else, it's still a recovery. Bouncing back from what many feared would be a collapse of our financial system; our economy is beginning to trudge forward. While Fed Chairman Bernanke and friends did what they felt was best to stabilize and grow our economy, some of their methods may cause us to have a much slower recovery than what we experienced in the early part of this decade.
Two of the Fed's primary tools were to lower interest rates to record lows and to print more money in order to cover the cost of the stimulus packages. Naturally when interest rates are lowered people want to borrow more money in order to purchase the items they need or want. As spending increases our economy moves forward. At some level of increased spending, the laws of supply and demand dictate that costs will also rise, thus creating inflation.
Another way to create inflation is by printing additional money. When more dollars are printed, the value of the dollars already in circulation decreases (again due to the laws of supply and demand). As the value of dollars decrease, the cost to produce items increases.
Typically inflation is combated by increasing interest rates, yet the economy hasn't recovered enough for the government to begin that process. Unemployment is still high and people are afraid to spend as they have in the past. People are still concerned that they may lose their jobs. Also, while interest rates are low, banks are not lending; and the lending they are doing is becoming more expensive and restrictive to consumers.
As a result of all of this, we’re likely to see increased inflation, tempered spending, and interest rates that try to play catch up with inflation. A similar series of events took place during the economic recovery of the mid-late 1970’s. During that time, we saw higher inflation and skyrocketing interest rates.
While the markets did recover, they did so slowly. After initially rebounding off of the lows in the early 70’s, the markets more or less leveled off for the balance of the decade. There were ups and downs, but they were far less then what we’ve experienced since the late 1990’s.
Of course there’s no telling exactly what will happen over the next three to five years. However, it does seem as though after getting burned in the early and late parts of the past decade, investors have become wearier of the stock market than ever. That combined with a slower growth period for the economy, could lead us to a similar flat to gradually inclining stock market. While that may be a relief from the roller coaster ride we’ve been on for the past fifteen years, it may mean that returns are far less than many would normally predict for portfolios.
In an effort to prepare for a flattened market, we’ve been positioning our clients in income producing investments and investments that could potentially grow even if the stock market remains flat. Finding investments that are uncorrelated to the stock market is the hallmark of a well diversified portfolio. Consult with your financial advisor to learn how a slowly increasing or flat market could impact your portfolio and retirement goals.
This article is for informational purposes only and is not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
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