Market Returns Have Been Flat: Crain’s Cleveland Business Asks Zach Abrams for His Thoughts.

Stocks Lose Luster Amid Flat Return Cycle

Saturday, May 28, 2016

By JEREMY NOBILE 

For the stock market, the future ain’t what it used to be.

Stocks have lost much of their luster in the thick of a flat return cycle. And while most economic forecasters don’t see another recession on the near horizon, the outlook isn’t terribly bright, either.

While stocks are hard to get excited about right now, it could definitely be worse.

Experts generally chalk up the state of the market today to a slew of factors from prolonged low interest rates and a strong dollar to general international market volatility and slow corporate revenue growth putting pressure on margins. Some major investment banks, like Goldman Sachs, have downgraded stocks for the next year as a result.

Local investors are expecting much of the same lukewarm performances.

“Right now, we’ve had four consecutive quarters of negative earnings,” said Anna Rathbun, director of research for CBIZ Financial Solutions. “That is creating uncertainty on the fundamental level for the markets, and it’s making everyone very jittery.”

Much of investor jitteriness is attributable to a global divergence in interest rates, she said. While the Fed hasn’t ruled out a rate hike in the summer, other central banks outside the U.S. are cutting rates. That would make the dollar stronger and contribute to market uncertainty.

“The central banks are making investors nervous,” Rathbun said, “and that nervousness ultimately contributes to the flatness in the market.”

The markets are merely “treading water,” said Bruce McCain, chief investment strategist for Key Private Bank.

“It’s a tough game, and one not very reassuring for investors who haven’t decided whether to give up and go to the sidelines or bid more aggressively in hopes they might move up in the future,” he said. “It’s a waiting game.”

Hope certainly isn’t a sound investing strategy, though. And while some frazzled investors might get the inkling to pull out of equities entirely, advisers are cautioning against that.

“Despair isn’t a great strategy either when you know you could be left standing at the platform when the train rolls out,” McCain said.

Zach Abrams, a portfolio manager at Capital Advisors Ltd., takes a similar perspective. He often finds himself reminding clients today they “can’t squeeze water from a rock.”

In other words, you won’t make anything if you don’t play the game. But when returns are dismal, convincing clients of that can be more difficult.

Abrams is forecasting low, annualized returns around 5% over the next decade in the U.S. stock market. A more average return would be closer to 9%. So while he’s not forecasting negative returns, the outlook for performance is still below average.

Nonetheless, there’s still money to be made.

Advisers say now is the time to remind investors to be patient and stick to their long-term goals — and defining those are usually more difficult than allocating investments.

Yet, a sideways growth environment underscores the importance of being spread out among investments.

“You want to be diversified among asset classes that move in different directions in any environment,” Rathbun said. “Sticking to your plan is really the discipline of investing so you can weather the storm of whatever volatility is in front of us.”

Credit has become much more appealing — valuations are better there compared to stocks — particularly as cash and bonds present rather lackluster returns as well.

Abrams forecasts emerging markets and other/international markets returning around 10% and 8%, respectively.

“If you are diversified across your asset base,” he said, “you can increase returns in your portfolio without taking a large amount of risk, particularly in this environment.”

Similarly, he cautions against betting too big on one class or investment.

“You really need to look at where you’re most vulnerable,” he said. “If you shoot for the home run without taking into consideration the down side, that could get you into big trouble.”

The general uncertainty with the global markets will contribute to volatility moving forward, as will the coming U.S. presidential election.

So don’t expect market forecasts to change drastically anytime soon.

“That rising dollar, even less growth overseas and the presidential election … will continue to hammer at investors’ psyches,” McCain said. “That will give us thrills and chills over the next few months as people focus on choices that a lot of polls suggest a lot of voters just don’t like.”

“It’s not going to be a fun time for voters as they try to work their way through that election and the implications of what that might mean for the economy,” he added. “The uncertainty will tend to keep prices more range bound, at least more restrictive than they would be otherwise.”

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

Diversification does not guarantee a profit or protect against a loss.

Emerging markets are sought by investors for the prospect of high returns, as they often experience faster economic growth as measured by GDP. Investments in emerging markets come with much greater risk due to political instability, domestic infrastructure problems, currency volatility and limited equity opportunities (many large companies may still be "state-run" or private). Also, local stock exchanges may not offer liquid markets for outside investors.

International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties.

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