A trendy phrase being heard around markets these days is "the new normal." The phrase captures the idea that, instead of interest rates rising rapidly to, say, five or six percent, the reality is that this low-rate environment is the new normal.
Many have believed that interest rates are about to rise, a belief born out of past experience in earlier economic cycles. But there is an idea floating around markets that the economy is entering a new secular era of lower overall returns. The idea has been promoted by bond guru Bill Gross, the manager of bond giant Pimco. A recent RBC Economics report recently suggested advisors assume lower asset returns in the future. A recent conversation with Shailesh Kshatriya, senior investment analyst from Russell Investments
, revealed some interesting numbers that seem to confirm the notion.
Kshatriya recently looked at 10-year bond yields going all the way back to 1919. In an interview with Wealth Professional he notes that only by viewing this longer time horizon does the real story of yields becomes clear. He notes that in our current era, from 2001 to the present, the yield on 10-year bonds has been 4%. This is lower than the yields through the 1970s, '80s and '90s, when yields were much higher. But this era mirrors the time between 1919 and 1969 when yields were also 4%.
"Only in that period in the '70s,'80s and '90s did yield average 9%," says Kshatriya. "The average investor looks back to 1970 and thinks that's long-term. But that period was an anomaly."
During that anomalous era of the 1970s, '80s and '90s America went off gold standard. Oil production was expanding dramatically.The boomers were working and enjoying the fruits of a rapidly expanding consumer economy. But that era is passing. The new era, the "new normal", is really an era in which the historical reality is reasserting.
That is to say, investors had better get used to generally lower returns on assets. In the years ahead population growth will be lower. This will translate into lower overall growth. The old expectations that the economy would grow by 3 or 3.5% a year is optimistic. "As the demographic challenges work through the system expect lower growth," says Kshatriya.