Tom Sedoric and Casey Snyder

Expectations can be a funny beast. When I was in college and then early in my career in the 1970s, my father and his friends felt ‘terrible’ about the world being handed to my generation. It was the end of the Vietnam War and for the first time an American President had resigned. There was skyrocketing inflation and soaring interest rates (also known by that dreaded term of stagflation), and the post-World War II era of cheap oil that helped fuel historical levels of economic growth was over. Overall market returns in the 1970’s were dismal, at best. Yet, as the Broadway song famously said, “it’s not where you start, it’s where you finish.” Just when you’d think that an Ice Age-level of doom and gloom would prevail, the following decades were among the strongest for investment returns in American history (a good lesson in why past performance does not guarantee future results). 

On top of this, despite seismic stock market corrections in 1987, 2000, and 2008, falling interest rates helped lift investment returns for even the most conservative investors. What is interesting today is that despite plenty of warning signs, we see historically low interest rates fueling a growing return of market complacency. Sir John Templeton once famously observed that “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” I’m not sure exactly what stage we are at with the market that has emerged since the crash of 2008, but certainly see a lot of skepticism and darned little optimism or euphoria. 

I’m often viewed as a thoughtful skeptic, I believe due largely to our efforts to hedge smartly and not chase trends. History reminds us that bull markets don’t last forever but it’s important to remember that the current market is without historical precedence: the Fed and other central banks around the world have played a sledgehammer role in providing cheap, zero interest rate money aplenty. We have an equity market that continues to operate and feel divorced from an only moderately growing economy. Capital and fund flows into fixed income and away from equity are also a bullish contra-indicator. 

Perhaps the unasked question of the day is this: how do you keep complacency in check amid a negative interest rate climate? Cheap money does not mean easy returns. 

Yes, inflation remains down due to slack global demand. But as with everything, it comes with a cost. Low interest rates mean almost bargain basement returns on interest bearing instruments such as CDs or even the traditional savings account at your local bank. In effect, savers are penalized. And global economic growth is unlikely to come to the rescue anytime soon: before the halfway point of the year, the World Bank revised downward its global economic growth forecast for 2016 from 2.9 percent to 2.4 percent due to “sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.” 

As if this wasn’t enough, the Financial Times reports that bond markets are generating the lowest interest rates in 5,000 years, based of course, upon the limited information available from ancient texts. According to multiple reports, in early June negative-yielding worldwide government debt topped the $10 trillion mark for the first time. Not only was this an unimaginable sentence to write when I started my career, but it appears that many investors, especially large institutional ones, have an insatiable appetite to grab certain money-losing opportunities in fixed income as a hedge against larger market uncertainty. 

While the skeptic in me has plenty to digest, I am more optimistic about the younger generations that are coming of age. While there’s plenty of economic and political uncertainty, and a world fraught with as much danger as when I started, the next generations are learning important financial lessons early on in their careers Instead of relying on the markets, they may be more open to self-reliant fundamentals of what they can control: planning, efficient tax strategies, and personal spending and savings habits. 

They have also felt the impact of debt and may practice more personal discipline when it comes to discretionary spending. Many do not give into the “wealth effect” habit of ‘spending now, because the good times will roll on and on’- a difficult, yet vital lesson to be learned. Ultimately, this increasingly complacent era will pass, just as decades past have changed throughout my career. In the meantime, the younger versions of me, Casey Snyder and Erika Luczynski, continue to search for high probability opportunities while seeking to avoid the traps set by overly confident prognosticators. Just as my father was surprised by the prosperity of the 80’s and 90’s, maybe the selfsufficient habits of millennials will surprise many and fuel the next rising tide to lift all boats.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754