As we reflect on the 10-year milestone of Toledo Free Press, we cannot help but review the last decade in the investment business.
Tumultuous does not begin to describe what the U.S. economy, debt and equities markets have experienced during that time. Some of the statistics are troubling, while others are rather impressive, but altogether they have helped shape where our economy currently stands and how we expect to go forward.
In the past 10 years, the Dow Jones Industrial Average increased about 70 percent from 10,800 to around 18,000; the NASDAQ increased about 150 percent from 2,000 to almost 5,000; the S&P increased 76 percent; the U.S. dollar recently hit a 14-year high; 30-year U.S. treasury bond yields dropped from 4.5 percent to near 2.7 percent; we witnessed one of the worst global financial catastrophes the world has ever seen; and history’s largest Ponzi scheme was unraveled.
We have been through two presidents and three Federal Reserve chairpersons, all of whom pursued similar economic policies. Lastly and perhaps most significantly, the federal debt has risen from $7.5 trillion to over $18 trillion, due in large part to quantitative easing, TARP and interest rate policies.
That is a lot of numerical and statistical data to analyze in one paragraph. It is important also to remember that the gains and losses were by no means steady. For example, the Dow was valued at 10,800 in March 2005, but dropped to 6,600 in 2009, then went on a bull market that saw us reach 18,200.
While it is important to understand where we have been and how investments have performed, we cannot act on that information. The only way you made money on the 70 percent rise in the Dow over the past decade is if you invested in the Dow before the rally. However, all the information detailed above has significant value in determining where the economy is heading.
We believe equities are overvalued and have only been experiencing gains due to corporate stock buyback programs and investors who typically purchase debt instruments entering the equity arena in a search for yield. That is not to say that equities will not continue higher in the near term, but we urge extreme caution.
At some point, inflation will become an issue. An economy cannot create the amount of currency that the U.S. has over the past five years with no repercussions. Once velocity picks up and money begins turning over in the economy (which low gas prices may encourage), we expect to see inflation surpass the Fed’s 2 percent target and rates rise in an effort to keep inflation at reasonable levels. The rise in rates will likely increase the value of the U.S. dollar, which will continue to negatively impact the United States’ ability to export.
Congress and the SEC are not doing nearly enough to deter the “Madoff types” or to police large institutional firms in both the commercial and investment banking sectors. At present, leverage is at an all-time high and we have replaced subprime mortgage loans with subprime auto loans. However, regulators have displayed a willingness to fine large firms, extort their fee and allow them to continue to play their dangerous game. It is difficult to say what the results of these reckless actions will be, but it is all too similar to the years leading up to 2008.
The national debt does not concern us nearly as much as it does others. While the number is daunting at $18 trillion, rates are so low that the debt service is not unmanageable. Further, once rates begin to rise, the Fed will likely utilize the Federal Open Market Committee to enter the bond market and buy up the old debt with proceeds from newly issued debt, essentially refinancing the national debt at a more reasonable level. If we fail to address the rise in the national debt and take no action at all, however, then we will have a problem on our hands down the road.
We believe above all else that the next 10 years will present major opportunities to investors, if they know where to look. We expect to see an economic recovery and a stable Dow, but not until after some troubling times. Timing is everything. If you remain calm and patient, the next 10 years will be filled with prosperity and gains.
Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
