Having just celebrated Thanksgiving, says Kristina Hooper, the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors, we have so much to be thankful for as Americans—and as investors:
- The employment situation has improved substantially in the past year - Unemployment has dropped to 5.8% in October 2014 from 7.2% in October 2013. Even U-6, the broadest measure of unemployment, has fallen to 11.5% from 13.7%.
- Lower oil prices have put money back in consumers' pockets - On June 6, oil closed at $102.66 per barrel. Last Friday, it closed at $76.1 per barrel. A roughly 25% drop in a few short months, helps compensate, at least indirectly, for the lack of wage growth many Americans continue to experience.
- Global monetary policy remains very accommodative - Last week, the Bank of China lowered interest rates and the ECB president Mario Draghi suggested the probability of sovereign QE is rising. Even the Fed is looking at a broader set of economic data in assessing when to begin tightening. Policy makers want to ensure the economy is on solid footing before it acts. Even after the Fed's initial move, the environment will remain relatively accommodative, especially given that the Fed expects to maintain its balance sheet at its existing size through re-investment of its maturing assets.
- Most importantly, our veterans, who have made great sacrifices for our freedom - Thanks to our men and women in uniform, we live in a free society and enjoy all the rights and privileges that come with it, including a capitalist system.
But there are some items on our wish list for Santa:
- Higher-quality jobs and higher wages - There has been very little wage growth in the past few years, a result of the substantial slack in the labor market. In general, many Americans have lower-quality jobs— ones they're overqualified for, ones that don't pay as much, ones that don't include benefits—that are far worse than the ones they had before the global financial crisis. We are hopeful that will change as labor-market slack diminishes, although we expect it will vary by region and industry in the US.
- Less conflict in the world - Some of our greatest risks right now are geopolitical ones. Let's hope many of the troubling flare-ups we've seen recently begin to moderate. “The euro zone and Japan are concerned primarily about deflation while China is concerned with decelerating growth.”
- Stronger economic growth and a healthy level of inflation globally - It's clear based on recent monetary policy that Japan, China and the euro zone are worried about their economies. The euro zone and Japan are concerned primarily about deflation while China is concerned with decelerating growth. The International Monetary Fund downgraded global growth expectations for 2015 to 3.8% from 4% earlier this year. And while the United States is enjoying improving economic growth, it's not immune to what's happening on other shores. In fact, the October FOMC minutes show that the Fed is concerned about a global deceleration and the impact it would have on the United States. Let's hope that greater deceleration can be halted, and that economies can actually see stronger growth in the coming year.
- Investors who put emotions aside and invest with a plan - Investors, particularly younger ones, are far too risk averse right now. That's cause for concern especially since we expect more volatility going forward. A recent Bankrate survey showed that 39% of millennials—those ages 18 to 29 years old—felt that the best place to invest money they "didn't need for 10 years or more" was cash. While that's largely due to the kind of investing environment they lived through as young adults, it doesn't bode well for their financial security. Looking ahead, the investing environment will be more challenging with a lot of twists and turns. Still, investors should stick to a long-term financial plan and broadly diversify their portfolios, including an adequate allocation to stocks. It's risky not to be in risk assets.