The Independent Market Observer

3/11/13 – The New New Normal

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Mar 11, 2013 11:23:41 AM

and tagged Market Updates

Leave a comment

I am rather proud of that title. How often do you get to riff on Bill Gross (“the new normal”) and Michael Lewis (The New New Thing) at the same time? As a bonus, I think it actually reflects what we’re seeing as the economy and markets evolve.

The New New Thing, for those too young to remember, is a book about Jim Clark and his role in the new Internet economy. It’s a great read and recalls a time when everything seemed possible, when we were entering a new economy and it really was different this time. Freed from the constraints of geography (and profitability), Internet companies were going to change the world.

The funny thing is he was right. Not in the sense that everyone thought—but see that link to Amazon above? That’s where many people now buy everything. News is on the web. People spend more time in cyberspace than anyone would have thought back around 2000, even if the world hasn’t really changed.

The new normal, as proposed by Gross and Mohamed El-Erian, is marked by slower growth and higher inflation going forward, as well as continued high deficits combined with low interest rates. That, too, has largely proved to be correct. Growth has been slower than in any other postwar recovery. Inflation has shown up in asset prices, food, and energy, even though it hasn’t really made a mark on the indices. Deficits remain high and interest rates low.

It’s interesting to look at how the basically correct predictions of Gross and El-Erian are evolving as policy changes and to consider how they can be right over time, even as the results look very different from what everyone expected. As with the Internet, which is now a part of everyone’s life, people and markets are incorporating the new normal.

One way this is happening is that the workforce participation rate is declining. Older workers, in particular, are looking at the markets, realizing that the old normal isn’t coming back, and deciding to leave the workforce. Younger people are staying in school rather than joining the labor force. As a result, the unemployment rate is coming down faster than expected. Lower interest rates imposed by the Fed have prompted a search for yield, with corporate financing at record low levels, resulting in record profit margins for companies and record stock market levels. Housing prices have declined in unprecedented ways, forcing millions from their homes; private equity funds and investors are buying and renting many of those homes, clearing the market and letting house prices start to rise again.

My point is that the new normal is real, but, as the economy incorporates and adapts to it, the effects aren’t proving as revolutionary as expected. With the Internet, our lives changed in many ways—mostly for the better—but we are still the same people. The new normal has also changed our lives in many ways—mostly for the worse—but we remain the same people. Tomorrow, I’ll discuss specific examples of what I mean by this.


Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®