Some key investment and economic trends of the last few years started to change in the last few months.
I believe those changes will continue, and probably accelerate, through the rest of 2021.
One change, which I’ve been highlighting for my paid-up Retirement Watch members, is that returns from U.S. stocks are unlikely to continue to significantly outpace returns from many global stocks.
U.S. stocks, especially those of large global technology companies, reaped returns far above those of other stocks since 2016.
Many non-U.S. companies now have brighter growth prospects, and are trading at lower valuations than U.S. companies.
The U.S. firms that had the best returns face headwinds around the globe that include higher taxes, tighter regulations, increased antitrust enforcement, a backlash about privacy, higher labor costs and more trade restrictions.
Going forward, I expect the U.S. indexes to underperform many global indexes.
I anticipate Asian markets will surge to the lead. The Asian economies are likely to have higher growth rates than other regions.
In general, they have had better control over the pandemic and are recovering faster.
Investors are complacent about inflation in the United States because it has been very low for so long.
We’ve anticipated higher inflation for a couple of years by moving portions of our portfolios into gold and Treasury Inflation-Protected Securities (TIPS).
The Federal Reserve and other central banks have made no secret of their intention to encourage higher inflation.
The Fed won’t tighten monetary policy until U.S. inflation has been solidly above 2% for a sustained period.
U.S. inflation was steadily creeping higher before the pandemic and started a new path higher last summer.
Since last May, the Consumer Price Index has gone from near 0% over the previous 12 months to a recent 1.3% over 12 months.
I anticipate inflation taking a bumpy path over the next couple of years to a higher level than the markets expect.
U.S. investors and consumers benefited from a strong dollar most of the last 10 years.
Higher inflation and aggressive fiscal and monetary policies are putting downward pressure on the dollar that I think will continue.
In addition, China has an aggressive long-term policy to make its currency more attractive in international trade and investing.
The dollar peaked last April. It is down 7% over 12 months, which is a substantial move in a major currency.
Anticipate additional declines in the dollar.
What’s more, volatility in the U.S. stock markets settled into a historically low plateau in 2017.
Periods of low market volatility tend to be followed by periods of above-average volatility.
We saw a jump in market volatility in 2020, and that’s going to continue. Crisis-period volatility usually declines once the crisis passes.
But volatility remained at higher levels throughout 2020 and continued into early 2021.
Aggressive monetary and fiscal policies are one factor behind the higher volatility. Fact is, there is a lot more money circulating, and a lot of it finds its way into the markets.
But other forces increase volatility.
No-commission trading accompanied by easy-to-use apps from brokerage firms that encourage more trading would have increased volatility even without the monetary stimulus.
Of course, volatility also increased because of the higher levels of uncertainty caused by the pandemic and geopolitical conflicts.
I do not see either factor diminishing much in the near future.
The markets are forecasting a quick end to the recession and strong boom in the economy once the vaccines are widely distributed.
But rollouts of the vaccines have been slow, and a significant part of the U.S. population hesitates to be vaccinated.
Don’t be complacent and take for granted market and economic trends.
And don’t assume a new boom in the economy is a sure thing.
This is a good time to consider new opportunities and ensure the positions in your retirement portfolio have a margin of safety.
A good place to start is by getting caught up on my New Rules of Retirement. Follow this link for the full report.