This time age doesn’t always bring wisdom. After 30 plus years of watching the markets, this Bull Market March is very much like the beginning of the first administration of the Gipper when skepticism abounded and media attacks compounded, until economic growth took off in 1983. There is one major difference that savers and investors will have to confront this time around, however. The Bull Market of the 1980s started from a modern era all -time peak in interest rates and inflation. As rates fell and inflation subsided, the market took off. In the 1980s, it was not as if there were not any safe alternatives for yield-hungry investors. Investors could buy Treasury Bonds or CDs and earn double-digit returns. The current market has been on a roll for 8 years and investors have not had many alternatives.
Back then, stocks and bonds moved in tandem as prices on both assets went up. Today, warning signs are flashing as bond prices are going down and stock prices continue to go up. There are no warning signs of excess valuation as there were in 1999 or credit bubble as in 2008. The hope that normal economic growth of 3-4% could return with a massive Trump tax cut along with the fact that real returns after inflation and taxes on safe assets continue to be near zero may be creating an environment for a nasty correction as investors reach boldly for returns.
The warning today is not to get complacent as notable pundits and portfolio managers with excellent track records like portfolio manager, Robert Rodriguez and Nobel Prize winner, Robert Shiller, are firing warning salvos of an impending steep correction. Shiller, who called the housing bubble and coined the term “irrational exuberance”, even before Alan Greenspan, believe that the market is overvalued because interest rates have been artificially low. Rodriguez who is one of the few money managers with a track record back to the 1970s left in the industry is even more skeptical. In addition, the granddaddy guru of Bond Fund managers, who also has been running for nearly 50 years, Loomis Sayles Dan Fuss believes that 2017 Treasury note yields approaching 3% by year end will be the by-product of increased infrastructure spending and a stronger economy. Younger Bond guru, Jeffrey Gundlach believes the same, according to their respective websites at Loomis Sayles and Doubleline Capital. The Wall Stree Journal’s Streetwise editor. James Mackintosh, said that valuations stand at the higherst level since 2004 and surpassed only by the dot.com bubble of the late 1990s. If these veterans are correct, bond investors will face significant paper losses. Very few stockbrokers and money managers, who are still not working under a fiduciary standard today, have ever managed in a prolonged rising rate environment
So, what is one to do. Here are 3 suggestions for savers and investors today.
- Look at bond alternatives such as Income REITS and Fixed Index Annuities which produce a guaranteed stream of lifetime income with little probability of loss provided the insurer stays solvent as had happened 98% of the time, according to the NAIC (National Association of Insurance Commissioners). Some of the hybrid annuities, even provide a chronic illness benefit, provided the saver is not able to perform certain activities of daily living.
- Keep any fixed income maturities in line with when you need the money and short to protect principal. If rates do go up, the shorter the maturity, the less negative impact on one’s principal.
- Talk to your advisor about the impact of rising rates on stocks over time. A reflated growing economy can be good for stocks in the short run but as yields on bonds go higher, the stock market becomes more vulnerable to major corrections as we saw in the 1970s,1984, 1987 and 1994.
Finding a Financial Sherpa that can provide disciplined advice in uncertain times is critical. The National League’s last .400 hitter, Bill Terry, was playing against another Hall of Famer, Dizzy Dean. The first time up in a game in the 30s, Terry lined a shot off Dean’s leg for a single. The second time up, he drove a screamer to centerfield that just barely missed the pitcher’s ear for another single and the third time up he hit a liner that about tore Dean’s glove off for another single. At that point, Hall of Famer, Pepper Martin strolled over from third base and said “Diz, I don’t think you’re playing him deep enough. It will be critically important when the next correction hits to have a team that has been hit before and is deep. That’s the Masterplan Retirement Consultant’s conviction comes from and the reason why we believe it is best to “Plan Well and Prosper”
Investment advisory services are offered through MasterPlan Retirement Consultants, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants is a Registered Investment Advisor in the State of Georgia. Insurance products and services are offered through Fricks and Associates, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants, Inc. and Fricks and Associates, Inc. are affiliated companies. All written content is for informational purposes only. Opinions expressed herein are solely those of MasterPlan Retirement Consultants, Inc. and our editorial staff. All information and ideas should be discussed in detail with your individual adviser prior to implementation. MasterPlan is not affiliated with the Social Security Administration or any government agency.