It has been 10 years since Lehman Brothers failed. That was the ultimate culmination of one of the worst decades in economic history when three recessions occurred in one 10-year period. Remember the …
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It has been 10 years since Lehman Brothers failed. That was the ultimate culmination of one of the worst decades in economic history when three recessions occurred in one 10-year period.
Remember the dot-com bubble? That collapsed in 2000 only to be followed by another recession in 2003 and the Great Recession in 2009. These were not good years for investor returns. Based on a recent study by the San Francisco Federal Reserve, the average American lost $70,000 in lifetime income due to employment situations or investment losses due to the last recession.
The near-zero interest rate environment that followed 2009 created a worldwide limbo of low inflation and anemic growth that characterized the post-crisis years.¹ So what should we expect next? It seems like we have been beaten up and then put in time-out for nine years and now wonder what the next decade will hold.
Unemployment has improved but wages are stagnant. Investors made significant gains since 2009 but now worry the end is near. No matter what side of the table you sit on, the waiting game feels like additional torture, except that your balance sheet may have more than doubled if you own a house or have equity investments the last nine years. It’s a shame we can’t be more euphoric about low inflation and high returns. Instead, we Americans tend to focus on what is wrong instead of what is right. And there is plenty of both.
The current business cycle appears to be dying a slow death as I have written about before. Now we see stress fractures appearing in the stock and bond and real estate markets. Values are no longer climbing precipitously, and stock prices are leveling off. Rising interest rates will create its own set of issues, including soaking up excess money supply which is exactly what the Federal Reserve hopes to do. A natural side effect is that it costs more to buy a house which will automatically start to affect housing prices.
The price of cars will go up with tariffs, and if you need to finance your vehicle, you will notice zero interest rates have disappeared. Hence you are spending more, but don’t forget, your wages didn’t actually go up beyond the normal inflation rate.
This is what it feels like when money starts to get tight.
Meanwhile, consumer sentiment is setting record highs, which means we are spending like there is no tomorrow. However, this cycle will end, and we may wish we had planned a little better for the next decade.
I would encourage consumers to prepare for higher prices and tougher credit. Investors should strategize for short-term disappointment in both stock and bond prices.
Stock prices need continued rising earnings to fuel their current lofty place. Third-quarter earnings season will start next week, and the increase is expected to continue but the rate of change will likely start to slow. Subsequent quarters will continue the slowing until stock prices settle at a more reasonable rate.
Bond prices typically decline with rising interest rates. We are starting to see this in most bonds, less so in short-term and high-yield. However, with the expected increases recently announced by the Federal Reserve, this is bound to play out over time. This should help curb inflation based on the improved GDP (gross domestic product), however time will tell.
Don’t wait to review your goals, investments and time frame. Make sure short-term needs are not at risk and most importantly, don’t compromise your long-term goals for a near-term discomfort.
We don’t know what the next decade will hold, but it most likely won’t be like the last two. We likely won’t have three recessions, nor over a 300 percent return on the stock market.² The next decade will likely fall somewhere in between.
1.Evan Simonoff, The Long View, Financial Advisor, September 2018; 2. Big Charts
Patricia Kummer has been a certified financial planner for 30 years and is president of Kummer Financial Strategies LLC, a registered investment adviser with its physical place of business in the State of Colorado. Registration of an investment adviser does not imply a certain level of skill or training. Please visit www.kummerfinancial.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Any material discussed is meant for informational purposes only and not a substitute for individual advice. The opinions and forecasts are based on information and sources of information deemed to be reliable, but KFS does not warrant the accuracy of the information that this opinion and forecast is based upon. Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Street, Ste. 500, Overland Park, Kansas 66211.
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