Stocks Lose 7% in October While Annuity Rates Continue to Rise
It’s a fool’s errand to try to predict the market or respond erratically to the market correction (defined as a decline of 10% from high) that we’ve been flirting with recently. But, at the same time, it’s important to be cognizant of the kinds of market conditions we’ve experienced in recent times and have awareness about the kinds of market conditions that could plausibly be ahead of us.
In and of itself, it’s not that important that stocks lost some ground in October. Volatility is normal and letting the daily headlines drive your investment strategy is not the best way to take the kind of long-term approach to investing and retirement that is shown to be most effective over time.
But there are warning signs building that the 8-10% average market returns we’ve experienced over the last decade likely are not here to stay.
This week, I read with great interest this thread of Twitter by respected financial planner Meb Faber. The thing that most caught my attention was some of the technical work he linked to about CAPE ratios. Without getting too technical, CAPE measures how expensive stocks are relative to their earnings. It’s a methodology popularized by the Yale Professor Robert Shiller. This interactive tool shows that United States stocks are expensive (high CAPE multiple) relative to historical norms and other countries today.
Many smart financial professionals believe we’re headed towards a much lower period of market growth than the last decade, and it boils down to the fundamentals of the economy.
The last decade has had basically everything going for it — an inexpensive starting point because of the 2008 Financial Crisis; declining unemployment; tax cuts; and a relatively accommodative Federal Reserve interest policy.
Compare that to today.
- Valuations: Based on almost any metric, stocks are more expensive than they’ve been at any point since right before the Dot Com bubble bust.
- Unemployment: It can’t go much lower. It’s already below 4%, which many economists previously had assumed represented full employment. Can it go to 3%? Sure, but it’s a lot more likely to reach 5% before it ever reaches 3%. We’re probably not at the lower bound, but certainly close.
- Government deficits: The tax cuts have massively increased the federal government’s deficit already, with more to come. Deficits mean we’re racking up debt that will eventually have to be repaid and usually requires the kinds of austerity measures that reduce growth (and stock market valuations). Case in point: Europe.
- Fed Interest Rate Policy: For the majority of the last decade, the Fed set short term interest rates below 1%. They are now over 2% and may be around 4% by the end of next year. Higher interest rates, all else equal, make stocks less attractive and bonds and income annuities or fixed annuities more attractive.
By no means is any of this to say that I know what will happen in the market, but recent events are a good reminder that the last decade of stock market growth is unprecedented. When unprecedented events happen in the market, there’s often a reversion to the mean.
The guaranteed 4%+ growth of most top-paying fixed annuities are starting to look more attractive in a world where the stock market is expected to under-perform relative to the last decade, and that’s something that almost every expert believes will happen.
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