It is sometimes difficult to describe “normal” anymore, but the past few year shave been an unusual time in many respects. The nature of the environment has been atypical in terms of the pace of economic growth, government policy,market leadership, disruptive new technologies, and the election cycle to name a few.
We have seen the U.S. economy hobble out of one of the deepest recessions in U.S. history at a pace that has frustrated many. The U.S. is not alone however.Growth rates have fallen around the world, contributing to a general discontent among the populace of many countries and encouraging populism and protectionism. Policymakers have responded with unprecedented monetary stimulus that has included 0% short-term interest rates and asset purchases which have pushed the Federal Reserves balance sheet to $4.45 trillion or 24% of GDP.
Low interest rates have challenged investor efforts to produce income, creating a global scramble for yield. It has reached a point where investors today are willing to accept negative real interest rates on investments that may extend 10 years or longer, a strategy that to us makes little investment sense. At the same time, the sub-par nature of the expansion and the lingering stingof the great recession have created one of the most distrusted bull markets in history. Fear that another 2008-like crisis could be around the corner has driven a persistent flight toward safety.
Unusual is also one of many terms that can describe the current U.S. election cycle, which has pitted two controversial party candidates against one another. The election cycle has stirred emotions and created anxiety about what our next President’s leadership will mean for America. Such an environment has helped encourage dramatic headlines that present either dire or overly optimistic outlooks.
Finally, disruptive technologies are permanently changing the business and economic landscape at what seems like an increasingly rapid pace. This is evidenced by advancements in robotics, genomics, mobile internet, cloud-based computing, and driverless vehicles among others. Obviously, not every new technology will be broadly impactful, but some certainly will change the status quo. One example hitting close to home has been horizontal drilling, which transformed the balance in the world energy markets.
We do not believe unusual times necessarily call for unconventional responses or dramatic shifts in investment strategy. In fact, we would argue for just the opposite. The more uncertainty that appears in the outlook, the importance of relying on time-tested, flexible, and objective long-term strategies becomes even greater. Unique market conditions over the past few years have presented investors with a number of opportunities to make classic mistakes – selling into panic, chasing performance, or succumbing to radical headlines.
We believe discipline, diversification, and a focus on fundamentals are essential to reaching financial goals and avoiding investment pitfalls associated with uncertain times. It is also essential to pay close attention to the price paid for investment assets since valuation plays a key role in future returns.
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