When will financial markets provide decent returns?
As this column is being written on Monday afternoon the Dow Jones Industrial Average is down by more than 100 points for the day, with two other market averages, the NASDAQ composite and the S&P 500 both showing decreases as well. Not to be outdone, bond markets are also getting in on the depressing action, with the yield on a 10-year Treasury note reaching a historic low of just over 1.40 percent. For the various stock indices, the figures cited above still leave them in positive territory for the year, but the gains could quickly evaporate by year’s end.
And while the yield on various U.S. Treasury securities is not much to get excited about, at least yields have not yet turned negative. While a negative yield may seem implausible, such is not the case. Last week in Germany, a two-year note auction posted an average yield of minus 0.06 percent, indicating that investors were willing to get back less than their initial investments after a two year wait. Of course, it is possible that present investors anticipate they can still turn a profit even with a negative return. How does that work? Should it happen that economic circumstances deteriorate even more in the euro-zone and rates become more negative, current investors could sell their “high yielding” securities — which carry a slight negative return — to new investors who prefer them to new securities with an even worse negative yield. It may sound strange, but it could happen. Or perhaps loosing 0.06 percent over two years seems like a sweetheart deal compared to the uncertainty of things to come.
Therein is a reasonable answer to the question of the week: When will financial markets provide decent returns? When uncertainty is largely eliminated so people and businesses can plan for the future with some degree of confidence.
Over the past five years, huge portions of the world’s economy have undergone a gut-wrenching downturn and a weak recovery, which at times seems ready to hit a stall-out speed. In the first quarter, the U.S. economy posted an anemic increase in real GDP of just 1.9 percent and later this week the second quarter estimate is due to be released. Most analysts expect the growth rate to be even more modest still, likely somewhere in the range of 1.0–1.5 percent.
Last week China issued its second quarter GDP data and this once high flying economy, which tended to boast of growth at or above 10 percent, experienced a deceleration to 7.6 percent real growth. While still tremendously strong growth by American and European standards, it is becoming increasingly modest, with some economists suggesting the Chinese government is putting its thumb on the statistical scale to keep the figure higher than what it actually is during the first half of 2012.
Whatever the exacting numbers may be — whether in America, China, or elsewhere — they are all indicative of a world economy struggling under the weight of the Great Recession of 2007/2009 and the inability of policymakers to craft a credible plan to end the pain and uncertainty which has followed.
Sadly, the pain has spread in a way that virtually all major segments of American society are suffering. For many working-age people the pain has manifested itself in the form of few new job opportunities and/or stagnant wages for families. In the case of retirees, the suffering comes from low rates of return on savings, no matter what exact form is used to invest those saved dollars (stocks, bonds, CDs, etc.). Since investment income is often a significant means of providing supplementary income during retirement, low rates of return have required a throttling back of living standards, as senior citizens attempt to keep their principal balances from deteriorating too rapidly.
Is it any wonder that consumers and businesses sit on their hands, waiting for serious and long-lasting decisions to be made regarding the unsustainable deficit/debt situations of governments around the world? So long as these pressing issues remain unresolved, uncertainty will remain high, while expectations, job availability and financial market returns remain low.
And unfortunately no easy, painless and sound-bite quality solutions (say, from American presidential candidates) will change this unfortunate reality. For better than half a decade, voters have been fed a steady diet of delusions, half-truths and confidence-killing proposals. If and when voters demand an end to such nonsense, the economy and all that it offers may finally begin to heal.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.