*Updated June 30, 2015* At Independent Financial Planning, the macro market environment does not factor much into portfolio design but there are some signs that can be interpreted from the market. Portfolios at Independent Financial Planning are strategic and commentary is helpful, sometimes, for controlling emotion and an attempt to understand the drivers of the market.
The stock market averages so far this year are showing lackluster returns. As of June 30th the S&P 500 has returned 1.23% year-to-date. Part of the reason for the overall weakness in the market is due to economic data points that are not fitting into a consistent narrative. For instance, the housing market is improving and the wages for workers in home construction is rising, which are positives for the economy. On the other hand underemployment is high and GDP for the first quarter of 2015 has been revised to negative, obviously not a positive economic picture. This may have some thinking the economy is headed toward recession. I do not think we are headed for recession, but ongoing growth may be anemic.
For the past four years the economy has been growing around 2%. I do not expect that to change. Employment, a sign of health in the economy, has increased steadily over the past few years while the current Fed policy of zero interest rates has potentially slowed economic growth. Rents are abnormally high in comparison to home prices and student debt is at all-time highs despite the fact that individuals and families are reluctant to take on debt. This is placing pressure on the millennial generation, ostensibly holding back the engine that should have begun to fuel economic growth.
The practical application of these observations is to expect lower overall returns across asset classes. Investors, in my opinion, should remain diversified, and reduce their return assumptions when it comes to financial planning. I would not advise eliminating diversification in expectation of a downside market move.
