2021 Second Quarter
With the Standard and Poor’s 500 index up over 90% from the low reached last March, the stock market has me wondering what is in store going forward.
The S&P 500 is close to or exceeding lofty pre-2021 analyst expectations with a run of +8.55% in the second quarter and +15.25% year-to-date. In other words, it might begin to run out of steam soon. I just received Vanguard’s Market Perspectives newsletter and they are predicting domestic equity average annual returns of 2.6% - 4.6% over the next 10 years. This range is a significant drop given that the average return was close to 15% over the past 10 years for the S&P 500.
While I will always have a home bias with most of our investments based in the United States and will continue that practice going forward, we have also selected top foreign stock managers to help us should the U.S. stock market dominance begin to lag. According to Goldman Sachs, European equities are looking more attractive when compared to domestic equities and Vanguard projects “global equities excluding the US” will return 5.5 - 7.5% over the next 10 years. Our model currently has a weighting of about 21% overseas equities right now, which I feel comfortable with.
There has been a lot of news recently about cryptocurrencies and the volatile returns that have gone along with some of them. You might have heard about Bitcoin or Dogecoin. Like gold, cryptocurrencies offer no dividends or income streams. Investors are simply hoping their purchase price will be lower than their sales price – it is complete speculation. I believe the driver behind investors’ motivation to purchase these currencies is the idea these currencies will be free of any government influence or control. I am not entirely convinced. China has been cracking down on Bitcoin and other cryptos to make room for their own central bank digital currency. If you think China is alone, think again. Kiplinger’s May 7th edition reported that the US “Federal Reserve and private researchers are working on pilot projects for a digital currency that the central bank could issue directly, giving the public a digital alternative to coins and banknotes. A future digital greenback could lead to reduced costs for transferring money and speed up settlements of financial transactions. However, it could also make it harder for banks to attract deposits, since would-be customers could park their digital currency directly with the Fed versus in a commercial account.” They go on to mention that there are more than 30 central banks around the world looking into launching a digital currency of their own and the Federal Reserve chair, Jerome Powell, believes a digital dollar is a high priority. If the Fed does come out with a digital greenback or even if cryptocurrencies begin to take hold, you have to wonder how that would impact the US financial system. Why would savers invest their hard-earned cash with any of the banks/credit unions when one could skip the “middleman” and invest these dollars with the full faith and credit of the US government for ultimate protection? Obviously, banks and other financial institutions would have to offer higher interest rates to attract these digital dollars. Cryptocurrencies sales pitch would have to be that they offer freedom from government influence and control, but I would be wary of that pitch. We plan on staying away from crypto currencies unless clients request we add them to their portfolio.