MAKING CENTS OUT OF THE NEWS
(June 9th, 2016)
Investment Market Expectations
By Tom McAllister, CFP®
We are now more than five months through 2016 and the stock market so far is basically flat. It is difficult for this observer to see substantial up moves for the rest of the year given the weaker earnings and slow economy. Nevertheless I still see room for another 3-5% in the Standard and Poor’s 500 average by year end.
The reason for this modest optimism is simple. Where else can an investor put their money? Stocks are still reasonably attractive when compared to the options available. Certificates of Deposit pay less than one percent and bank savings accounts almost nothing. Short and intermediate term treasury bonds and bills range from less than less than one in the short term to almost two percent for ten year obligations. With inflation at two percent investing in these taxable items guarantees a loss on your principal.
Bonds have yielded in the five percent range in the last 20 years. But they are not a reasonable option at their currently all-time high prices, with yields at their all-time lows.
In coming years economists predict slow economic growth in both the United States and Europe. The consensus outlook is for stock returns in the next 20 years could be as low as 4-5%. Fixed income yields could be as low as zero to one percent short term and no more than four percent for the long term.
So where is an investor to go these days?
Stocks have returned an average right at eight percent annually from 1985 to 2014 It is difficult to build a reasonable expectation that returns in the next few years will be this generous.
A portfolio of quality stocks currently, on the other hand, can be had which averages four percent in dividends and, theoretically at least, also has inflation protection looking out three to five years. My expectation for the entire market is in the six percent range.
As I recommended in a recent blog, if asked where to invest a lump sum under current conditions I would divide it 60/40 between quality blue chip dividend stocks averaging four percent yields and quality preferred stocks. Regular readers are aware of my recommendation to use preferred stocks yielding over six percent for fixed income investing.
Call me for specific recommendations.