Why have and why do so many people continue to migrate to the USA? One reason is because of the belief that life in the USA is superior to where they are coming from. In short, they believe their life will be treated better here in the areas of life that matter most to them. This is no different with money. In general, money migrates to where it feels it will be treated the best given its owner’s desires and risk tolerance.
Large cap dividend stocks are a place where many investors see their money being treated best, given the Federal Reserve’s perpetually low interest rates. The quest for yield has brought a significant share of investors to a realm where risk is much higher than it ever existed in certificate of deposit (CD). Paradoxically, the hive minded investing class finds comfort in the Fed’s new normal of scant borrowing rates. If the market is the only game in town for a decent return, then how bad could the market actually get? We’ve all got to drink to cool-aide or dehydrate. Drink we do.
If the market continues to fail to top the last top seen, how long does the punch drinking party continue before panic strikes and the greater fool theory rapidly unwinds before the eyes of the watching world? To think investors have recovered from skittishness brought on by the last decade’s market crash would be a great error in judgement. One aspect of ‘the new normal’ for investors is bouts of extreme volatility. It becomes almost a self-fulfilling prophecy. Spikes in volatility spark fear, fear sparks further selling and the cycle continues until a rush of bargain buyers convenience themselves the market, and society for that matter, are not doomed.
This is not meant to sound bearish. We live in a time where we’ve convinced ourselves the Fed and other like groups around the world have thrown their best punch and come up wanting. All the while we see Baby-Boomer after Baby-Boomer leave the job market and face the 2nd half of their life. A wave of wealthy individuals that want to live off of the yield of their savings, but do not need to establish themselves, buy new homes, start new families or start up new businesses. The main block of their offspring, the Millennials, have slipped, fallen and then slipped again as they’ve attempted to establish a career. Progress is coming, just at a much slower pace than anticipated.
While growth exists, it’s not comparable to what was seen after the 2nd World War or even the tail end of the last century. We live in a different time. We live with much different demographics. We live with a radically different job market. Over the last eight or so years we heard “Change we can believe in!” For those years and even before that we were in the midst of change we could believe in, yet it wasn’t the change to bring us to some social promise land. It was a change that would reshape the way we see the world, invest and plan for the future.
We’re often told that the market doesn’t reflect the economy and maybe to a certain extent that’s correct. I’m not sure what you or I are supposed to take away from that, besides from abstaining from gloating that the S&P 500 hit a new high. The market is a reflection of something more than itself. The market is a reflection of where money is treated best.
Given all the calamity whether social, political, economic or otherwise, people will migrate over time to where they are treated best and they’ll manage their money the same way. What is the best today might not have been the best yesterday and so on. A six-month teaser rate CD at 7% is a pipe dream today, yet wasn’t in 2006. Best in investing is relative to the current market conditions and those conditions feed off of the multitude of factors influencing the world we all live in.
The bottom line is, no matter how good you swim, you’ll always swim faster with the tide than against the tide and it’s vital to know the difference between the two. Retired people need a constant return on their savings. Savings accounts, CDs and bonds yielding next to nothing and will likely continue to be that way throughout the year and maybe even 2017. Where in this environment is money treated best?