Crashes Matter
Financial advisors regularly tell clients that since the market grew 6% annually since 1900. Therefore, that is what returns will be in the future. The chart below shows $100,000 invested at 6% annually from 2000 or 2007.
Unfortunately, it didn’t work out that way.
During the past 20-years, the annual return for stocks has been just 4.96% annualized. Since the peak of 2007, returns have annualized roughly 8.14%. Over the next decade, current valuations suggest average returns will return to 2% or less.
For boomers who start in 2000, whose financial plans assume high return rates to offset a savings shortfall, they are now well short of their retirement goals.
Asleep at the Wheel at the Federal Reserve
One major way in which the economic facts have changed radically has been that budget policy has become substantially more expansive than Jerome Powell had anticipated last year.
John Maynard Keynes famously said, “When the facts change, I change my mind. What do you do sir?”
Evidently, Federal Reserve Chairman Jerome Powell does not subscribe to Keynes’s view. Despite the major changes in the monetary policy facts over the past few months, Powell sees no reason to change his earlier commitment to an ultra-easy U.S. monetary policy for the next few years. For this error in monetary policy judgment, the country is likely to pay very dearly.