My sister wrote yesterday that their financial advisor is pessimistic about economic and market outlooks for the next several months. She asked what I think. Here is what I sent her, somewhat edited:
I'm REALLY bad at this sort of thing, but here goes:
I think all the financial markets are over-heated. The reason is that interest rates are SO low that some/many people would rather buy stocks or corporate bonds instead of gubmnt bonds with such low yields available on the gubmnt bonds.
I really cannot believe interest rates will stay this low much longer. And once interest rates on gubmnt bonds go up, people will show more interest in gubmnt bonds and shift some funds away from stocks and corporate bonds back to gubmnt bonds. So just this effect alone will cause stock prices and indices to drop.
At the same time, higher interest rates will tend to choke off some of the growth in spending on houses and other consumer durables. Couple that effect with the demographic effect as baby boomers try to downsize a bit (as we did) as well as spend less in general as they slow down, and look for housing prices to stop rising much and even to fall in some of the more bubbly housing markets. And as interest rates rise, look for consumer borrowing for spending on durables to drop from what seem to be pretty high levels these days.
Finally on the demand side, wait for the unfunded pension and other liabilities of many places like Illinois, California, Greece, Italy, Spain, Ontario and others that we don't know about to hit. As that happens, either those pensions will have to be shaved or gubmnt revenues will have to go up somehow... and yet they are finding it increasingly difficult to raise taxes.
Furthermore, as taxes are raised, too many jurisdictions are at a point where higher tax rates will induce less work and increased flight from the jurisdictions. These supply-side effects will lead to further declines in output and incomes.
Meanwhile, gubmnt regulations just keep growing and growing. These also create negative supply effects as it becomes increasingly costly to carry on any kind of business.
[as a for instance, see this by Scott Sumner, especially his point #4]
On the plus side, there are more and more free(r) trade deals being negotiated. Locals will object, but overall freer trade means more world production, more world wealth, and (even in the rich countries) higher living standards for all, on average.
However, the slowdown in China has been coming for quite some time. That will also have some (likely slight) negative impact on other economies.
With all this having been said, you may not want to trust me on it. I have been pessimistic about market conditions and economic growth for the world economies for several years and have clearly been either wrong or (more likely) premature.
My own decisions have been as follows:
- Until 2005, we had all my pension funds in equities (common stocks). We cut that back to 30% then. That meant the crash in 2007-8 didn't hurt us much but we also missed the massive upswing in the markets after that. But since I know I will never be able to time market swings, that doesn't bother me a whole heckuva lot. I do know that I would be VERY uncomfortable if we lost half the market value of my pension fund, so I am not willing to try to ride out any huge dips in the stock market with too much invested in stocks.
- Right now we have scaled back our investments in stocks to only 25% of our portfolio, and I'm seriously considering cutting it back to only about 20%. [side note: Because of the US tax laws, I must invest in individual stocks and cannot buy mutual funds ARRGGHHH].
- We have about 35% of our investments in high-quality corporate bonds. We'll take a hit on these because as interest rates go up, bond prices go down. We can live with this.
- The rest is in short-term money market stuff: short-term gubmnt bonds and treasury bills.
My instructions to the outfit that handles our investments (I won't do it on my own) is to try to stay fairly liquid (i.e. short term and in high-dividend-paying stocks). See this piece that I wrote a month and a half ago.
But keep in mind that I've been thinking this for over five years and it hasn't happened yet.
So, in conclusion, I think your financial advisor is probably right, but I have no idea what the timing or seriousness of the problem will be.