By Z. Andrew Yarumian
The Daily Record Newswire
Stock and bond markets generally do not react favorably to uncertainty.
In today’s economic climate, we seem to have an abundance of uncertainty heading into the future. The so-called “Bush Tax Cuts” are scheduled to expire at the end of the year, which would lead to higher taxes for almost everyone. Coupled with the Congressional elections in November, at this point we could see a substantial increase in Republican seats.
Despite speculation that Republicans will take over control of the U.S. House and have at least some chance of also gaining control of the Senate, no one really knows for certain to what degree the election will change the face of Congress. The only thing that seems certain is that the electorate generally is not pleased with most incumbents. So the outcome of what Congress ultimately votes regarding the tax rates for next year and beyond is in doubt. This uncertainty has a curtailing effect upon the spending plans of companies including hiring and will impact the strength of the future economy and stock prices.
Almost everyone agrees that the national budget deficit is out of control, but there is significant debate as to how to “fix it” — higher taxes, lower spending or some combination of the two? The debate even adds uncertainty to the economic equation. Given such uncertainty, how can investors feel confident investing in any asset class?
Conventional wisdom is that stocks probably will average only about 6 percent returns annually through the next few years, likely with high volatility. The 6 percent average is significantly less than the historical long-term expected return of 9 percent to 10 percent for equities.
The expectation for bonds is that we remain in a deflationary environment, but given the enormous national debt, at some point the bell will sound for super inflation, which clearly would be destructive to bond investments. The only question is when that actually will happen.
We all know residential real estate has been, and likely will continue to be in the doldrums. The next big fall in real estate is and will be on the commercial side, which also could have very chilling effects on the national economy.
Given the potential scenarios I’ve laid out here, and others, it is critical for most investors to be confident that their money manager is up to the task of navigating them through such uncertain and changing economic times. You may gain confidence by closely examining an investment manager’s longer term record of at least five to 10 years to determine how they performed in varying economic conditions.
You also could examine the period of September 2008 and the months thereafter to see how an investment manager performed during a particularly difficult and uncertain investment period.
You could ask your investment manager under what economic environments he or she would expect to perform best, and worst.
Performing that basic homework, you should at least gain more confidence that your manager will perform relatively well during our uncertain economic times.
Z. Andrew Yarumian is managing director, institutional relationships for Karpus Investment Management. He can be contacted at (585) 586-4680.
