Although there are still big problems out there (Greece, anyone?), the U.S. economy continues its slow expansion, and economics is no longer the concern that it was. The same, generally speaking, applies to investing. Despite many potential pitfalls, which I’ve discussed in detail, the market appears more likely to head up than down, at least for the moment.
So, while things are relatively slow on the new news front, let’s take the opportunity to look ahead to issues that will matter a lot in the next couple of years. In no particular order, these are four areas I think we’ll be concerned about. (We’ll delve deeper into individual topics over the next couple of weeks.)
This one actually has a bunch of subtopics—effects on the debt service of the U.S., effects on the housing market and the economy as a whole, and potential effects on the dollar’s value—but they all start with higher rates. Right now, we’re worried about when rates will start to rise. I suspect that, sooner than most people think, we’ll be worried about what those higher rates will do.
Many Americans have no money saved for retirement. Social security expenditures will rise over the next several years. And a crisis is brewing in the pension world that will end with people not getting the benefits they expect. Even for those who have saved, future returns are unlikely to match expectations. All of this, combined with an aging population, adds up to an enormous public crisis that will start to play out very soon.
One of the major criticisms of this recovery has been its slow pace compared with past recoveries. We’re gradually realizing that it’s probably because of slower population and workforce growth, along with slower productivity growth, rather than some defect in the economy—and that slower growth may be with us indefinitely. A great deal of policy is currently predicated on faster growth rates than what we may see, and the adjustment will be painful.
The U.S. remains the only real superpower, but there are significant power imbalances around the world that could well result in a geopolitical earthquake. China is a headline risk in this category, but so are the pending referendum on EU membership in Britain, the Sunni/Shiite confrontations in the Middle East, and the possible Russian resurgence in Eastern Europe, not to mention the ongoing conflict between the northern and southern eurozone countries. Believe it or not, the international environment has been unusually stable over the past couple of decades, and that stability will likely end over the next five years or so.
These are big issues, and the time to start thinking about them is now, at least in general terms. The U.S. remains uniquely well positioned to benefit, or at least ride out, all of these problems, but as investors we always need to be looking around the corner. These issues are my best guess at what might be coming.