With popular averages on the U.S. stock market near record highs in recent days, it’s worth asking whether today’s investors will be rewarded in the years ahead. Because while investors are often told that as long as they hold on for the “long-term” all will be well, history shows that for many investors and for many times, long-term investing doesn’t always deliver agreeable investment returns.
When Federal Reserve officials suggested in December and early this year that they expected to increase their key interest rate by 1% over the following year (four increases of a quarter percent each), I wrote of my skepticism on this page. And even as certain Fed officials have continued to “talk tough” in 2016, forecasting one, two or three more interest rate increases, skepticism among traders has steadily grown. April’s Fed meeting came and went without a rate rise. When the Fed didn’t pull the trigger in April, rate hike expectations were shifted to the next Fed meeting in June. According to a Reuter’s poll of 80 economists taken in late April, 63% expected the Fed to raise rates by .25% in June, with nearly all the remainder expecting rate increases some other time during the year. Only three of those economists surveyed expected rates to remain unchanged or to decline.
It’s no secret that governments around the world have been sharply reducing interest rates in recent years. In fact, many have now gone to negative interest rates to encourage spending and financial speculation. More than $8 trillion of government debt now trades with negative interest rates, where depositors not only don’t earn interest on their money, but have to pay for the privilege of lending money to another. In a world of governments holding ultra-low interest rates the clear long-term champion is Japan. While the U.S. government has held its key interest rate below 1% for more than seven years, the Japanese government has done so for more than 20. Since it appears that U.S. government is attempting to tread the same monetary path that Japan has taken, it seems worth analyzing the degree of “success” the Japanese have enjoyed with the same business model.
David A. Pace, CFA
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