Stock market commentators note the usual summer slowdown has arrived a couple weeks early. The S&P has been trading in a narrow band. Traders seem to have left the office early this year.
But as the herd heads out to the Hamptons a couple of interesting conversations have kicked up, including one about the supposed “secular stagnation” settling in over markets.
According to a recent Bloomberg report this “was supposed to be the year the U.S. economy ‘broke out’ and achieved growth.” But the new growth cycle has failed to kick-in as expected.Instead, suggest it looks like the US could be flirting with recession again. According to Goldman Sachs Q1 GDP will be negative at -0.7%.
Which is worrying, but not surprising. Each year since 2008 recoveries have been predicted but the expected strong growth cycles have failed to show. Why is this? More and more, some are wondering if there is a deeper issue here. Increasingly the question being asked today is this: Could the US be “incapable” of above-trend growth?
As recent reports note, this is “an idea increasingly in vogue among mainstream economists.”
This past fall global economic super-elite Lawrence Summers, speaing at an IMF conference, said the US could be in a period of “secular stagnation.” That is, there is a new period of more permanent low and slow growth emerging.
Something seems to be up. Interest rates have been, for years, at a level that would have sparked unsustainable hyper-growth a dozen years past. But today, nothing, Monetary stimulus could not be more intensive, creative ("quantitative easing") and still the economy seems unable to recover. Increasingly economists say this sluggish form of economy is the new normal, a fact advisors will have to work into assumptions about future market returns.
A new report from BMO Capital Markets suggests that investment returns over the next decades are likely to be more than 2% lower per year than they have been over the past. The report foresees lower returns on all major assets and suggests the average portfolio will only deliver a 5.6% annual return in the years ahead. This compares negatively with the 7.8% posted over the last 20 years. Bond returns will be just 4.0% over the next 10 years, down from 7.0%. Stock returns will average 7.0%, down from 8.8%. Turns out the high growth rates of the 1960s, when GDP expanded nearly 6% a year was an anomaly. Since then growth rates have cooled "to the point where 2% is now seen as nearly normal.” Looking ahead, growth rates will decline further to close to 1.5% in the 2020s according to the report.
That is, get used to it; the slow and sluggish growth is the new normal.
The BMO report attributes the decline being driven primarily by demographics, specifically the slowing in the growth of the working age population, as well as slowing productivity gains. Fast-growing emerging nations with larger populations, such as Indonesia and Korea, will pass Canada in the global economic growth rankings according to the report.