After a decade of economic growth and generally rising stock prices, conditions have grown a bit more uncertain and market volatility has risen. Now, some investors are wondering about the longevity of this positive wave. We doubt the next decade will be a repeat of the last, but we think there are five reasons to remain optimistic.
Despite the 2008 global financial crisis, there’s been an impressive increase in both wealth and living standards around the world. Although the rich became richer, this ongoing improvement in global wealth wasn’t just at the top. The average wealth per adult worldwide more than doubled to $63,000 from $30,000 in 2000. And the percentage of adults globally with wealth below $10,000 dropped to 64% from 80%.*
Rising wealth means better lives and more financial security for billions of people worldwide as they become less vulnerable to financial shocks. We think investors can benefit from this long-term trend with international equity investments in developed and emerging markets, taking advantage of faster growth in those regions.
At the end of last year, investors worried about potential changes to NAFTA and escalating tariff conflicts between the U.S. and China. In addition, there were concerns about dimming prospects for the global economy, and domestic headwinds stemming from oil prices and the housing market. As a result, stocks sold off sharply. But, since then, stocks have rebounded equally sharply as many of those concerns have faded, although none have been entirely resolved. We believe prospects are brighter due to a few factors such as: diminishing trade tensions with China and other countries; additional stimulus measures that can help stabilize economic growth; and the U.S. Fed’s return to more supportive policies. In our view, despite what is likely to be slower growth ahead, the long-running Canadian and U.S. economic expansions are on fairly solid footing. Corporate earnings should keep rising, and stock valuations are near average, supporting our expectation for attractive long-term returns.
Globally, voters communicated their dissatisfaction, and as a result, there’s a wide array of visions for the future and seemingly less consensus than in the past. Although politicians make promises to voters, those with the most extreme views don’t always win the day, and those who are elected may find their ability to fulfill those promises limited by the process and competing demands.
In the past, when policies have appeared to be detrimental to the long-term health of the economy, financial markets have sent clear, negative messages to prompt changes. We think investors should remain optimistic and remember that Canada, the U.S. and other democracies have a long track-record of increasing prosperity.
If you were disappointed in the recent performance of some of your investments, keep in mind that if every investment you own performs well at the same time, your portfolio probably isn’t well diversified. Signs of slower growth here at home and overseas meant Canadian and overseas equities lagged U.S. stocks last year, as they have in seven of the past 10 years. That’s partly because the U.S. economy and markets have been a key driver of global growth since the Great Recession. With pessimism about international equities reaching lows last seen during the financial crisis, we think they’re more attractive today.
Although you may be tempted to shift out of equities when challenges arise, that might not be a successful strategy. Many predictions don’t become reality, and markets move quickly. For example, the rebound in the TSX and S&P 500 in January and February more than reversed the sharp drop in December as the outlook improved. We think a better strategy is to stay invested in a well-diversified portfolio, and make timely adjustments to maintain the appropriate mix of equity and fixed income based on your comfort with risk and your long-term goals.
There are solid signs of improving long-term trends with plenty of reasons to remain optimistic. Talk with your advisor about how you can stay on track with your investing strategy and your financial goals.