Ignore the noise, lower expectations and keep your eye on the long term. That was the message from the Market Outlook panel at this week’s Envestnet Advisor Summit in Chicago.
“Keep your eye on that North Star,” said David Polak, equity investment specialist of American Funds and senior vice president of its parent, Capital Group. “Don’t ignore” the noise in the market “but don’t let it paralyze you.”
At the same time, advisors shouldn’t expect to reap the returns of the not-so-distant past.
“We’re living in a slower growth world, with lower rates and asset returns,” said Josh Feinman, chief global economist at Deutsche Asset Management.
With that in mind, Justin Christofel, a portfolio manager at BlackRock, told the audience of advisors that they should limit risks in portfolios because there is less compensation now for taking risk than there was five or even three years ago.
He sees opportunities in credit markets using money taken out of stocks. “Equity valuations are 17 times forward earnings, which is about 1.5 times what they were in 2006 and 2007,” said Christofel. He expects overall returns in the mid-single digits. “The inescapable reality is that returns will be more modest going forward. “
Polak of American Funds as well as other panelists expressed concern about the limits of monetary policy around the world. With rates still extremely low in the U.S. – the federal funds rate is 0.25% to 0.50% – and negative rates in many European countries and Japan, central banks throughout the global economy don’t have the usual tools to address an economic recession.
“The efficacy of monetary policy going forward is what is really worrying,” said Christofel. “What will we do if we fall into recession to stimulate growth?”
Feinman said low rates are also indicating “the desire to save is great and exceeding demand for capital investment.… The near- and medium-term problem is a lack of growth … Rates are telling you there isn’t enough government debt, not there is too much.”