It’s no secret that savers have been sacrificed on the altar of the wealth effect since the Great Recession a dozen years ago. The thinking of central banks at the time was that the surest way out of the global meltdown was to force savers, who typically are risk averse, into more volatile asset classes such as stocks, with the hope that their eventually increased net worth would lead to greater spending, and an expanding economy.
Well, rates did stay down and markets responded as though on cue. Unfortunately, much of that risk averse money remained in cash equivalents which paid truly paltry returns. The tragedy of the wealth effect strategy was that people with low risk tolerances usually stayed in savings vehicles, with diminished lifestyles, hardly the reward they were expecting for a lifetime of saving.
Savers who were able to move out a bit on the risk spectrum were rewarded by a massive bull market in stocks. With the Federal Reserve Bank now committing to three more years of what we refer to as zero bound interest rates, is now the time for risk-averse investors to throw in the towel and move into the market? Taking a wider perspective than U.S. equity markets provides some perspective.
The October 17th edition of The Economist notes that “The approach of taking more risk to compensate for lower interest rates has not always paid off, though. America’s frothy stock market has been an outlier. Savers elsewhere have been less well compensated for risk. Britain’s ftse 100 index is below its level in 1999. In Germany a boom in the 1990s did cause equities to rise from 20% to 30% of household assets. But when the bubble burst, retail investors’ enthusiasm waned. By 2015 shares were 19% of household assets. Japan’s stock market is still below its high in 1989.”
By most measures, valuations for domestic stock markets are elevated relative to their historical norms. For investors who can take a longer term view of the markets, we have no issue with maintaining equity positions, regardless of the outcome of the elections. However, for the risk averse who have witnessed the 50% rise from the April lows in the market and are experiencing “saver’s remorse,” we urge caution.
There will come a time when valuations will be more reasonable, and the odds of profiting over a five year time frame will be on your side. Unfortunately, when the odds for future gains are best, you will be most reluctant to commit your savings to the market. When your comfort level holding cash is at its maximum is likely the time to consider committing some of your savings to the market. This is the saver’s dilemma.