These are vexing times for ordinary folks saving and investing for college expenses and retirement. With stocks exhibiting extreme volatility and growth slowing in all the major economies, many individual investors are rebalancing portfolios toward bonds — savvy investors will resist this temptation and stick with stocks.
Throughout the bull market, big tech has played a big role — especially, Facebook, Amazon, Google, Apple and Netflix — but all now face challenges. The Justice Department’s sweeping antitrust investigation into their activities, privacy issues for Facebook and Google, Netflix losing U.S. subscribers to new competitors and Apple confronting the limits of iPhone and gadget sales.
Still, consumer spending and the broader service sector continue to exhibit significant growth, and the challenges big tech leaders confront more likely herald new opportunities for others than signal broader troubles for equities. For example, Walmart has fashioned a formidable web presence to rival Amazon in groceries, and Netflix’s woes are driven by Disney and others entering the video streaming space.
Microsoft has resurrected itself from a “legacy tech” to a leader in cloud services, and the revolutions in artificial intelligence and robotics are driven by a host of smaller firms that are cutting waste out of the economy. However, combing through companies to pick the brightest prospects requires information ordinary investors cannot muster, and they should stick to broad diversification and ask how stock valuations stack up against history and prospects for continued growth.
Over the last 25 years, the S&P 500 price-earnings ratio has averaged 25 for the trailing 12-months of profits. Currently, those are trading at 21 — indicating stocks are substantially undervalued.
The U.S. and global economies should continue to grow at about 2 percent, respectively, 4 percent and 5 percent nominally with household income improving moderately. That should translate into gains in corporate sales and profits in the mid- to upper-single digits — U.S. businesses earn substantial shares of their profits abroad where growth is still stronger.
The U.S. growth is adjusting to less emphasis on autos and residential construction — and temporarily Boeing — to greater reliance on digital technologies that are revolutionizing the services sector. For example, consumer accessible artificial intelligence through health apps and UberEats and DoorDash. Overall, profit growth may hit a nadir in the third quarter and cause stock prices to clutch down further but that metric should accelerate to about 10 percent by the middle of next year.
That’s the stuff of strong stock gains and a good reason to stick with equities.
For ordinary investors, stocks, bonds and CDs are the only reasonable places for retirement money. IRS depreciation rules make investing in rental property difficult, and small investors can expect increasing competition from large firms — with significant backing from Wall Street — expanding into the businesses of flipping and renting homes.
Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries by more than 50 percent, and no compelling argument has been offered that the coming decades will be any different. With the Federal Reserve and other central banks in an interest rate cutting mode, stocks will continue to enjoy the edge over fixed-income assets — even with only moderate profits growth.
Low interest rates are likely to continue. The world is awash with too much savings — businesses with more cash than new business opportunities and successful individuals looking for safe havens for their wealth. A good chunk of that will find its way into Treasuries and other U.S. securities.
Picking the next Apple or Amazon or timing when profits and stock prices will dip and then rise is a virtually impossible task — winning at that game has even eluded Warren Buffet over the last decade.
Small investors should invest for the long term by purchasing a broad-based index fund like the Vanguard, Fidelity or USAA S&P500 portfolios. And perhaps an international index fund to smooth results — sometimes U.S. equities do better while other times foreign stocks lead.
Once within 10 years of retiring, gradually move about half of that money into fixed income vehicles with maturities of less than five years. Avoid bond funds — it’s less risky to purchase fixed income through Treasury Direct or in CDs.
If you consistently add a reasonable amount to those investments throughout your working years, you should be in good shape to give your child a great wedding, pay tuition and enjoy a secure retirement.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.