The Stock Market’s Future Ain’t What It Used to Be
In recent years, investors often were rewarded for taking reckless risks, but in unforgiving markets, it’s harder to recover from mistakes.
3 min
With U.S. stocks off more than 7% and the bond market down almost 9% so far this year, many investors seem to feel they have to take more risk to catch up.
In fact, you should take less. In unforgiving markets, it’s harder to recover from mistakes. Over the past decade or more, stocks, bonds, real estate and cryptocurrencies—just about every asset—boomed. You often got rewarded for reckless risks and, even if you got punished, rising markets helped you recover quickly from your blunders. That won’t last forever.
A global survey of nearly 300 professional investors by BofA Global Research found in March that the percentage of fund managers with greater than average exposure to U.S. stocks climbed 27 percentage points from February. That happened even as many of them say their holdings of cash have edged up.
And fund managers’ trigger fingers are itching even worse than usual, with 42% reporting that their investment horizon is three months or less, up from 26% the previous month.
Individual investors don’t seem to be pulling in their horns, either.
“Alternatives” such as private equity, private debt, hedge funds and nontraded real estate have become so fashionable that investors are forsaking flexibility and low fees in order to buy them.
One of the most popular ways to invest in alternatives is through unlisted closed-end funds, portfolios of alternative assets that are registered with the Securities and Exchange Commission but don’t trade on an exchange.
Investors generally can’t get their money out daily, as they can at traditional mutual funds or exchange-traded funds. Instead, they can sell only at predetermined times, often four times a year, sometimes only twice—or even whenever the fund manager happens to permit it.
Holding on for years could help the managers produce gains; in the meantime, it enables them to harvest fat fees. Management expenses often exceed 1.5% annually. Such funds managed a total of $93.7 billion at the end of 2021, up from $54 billion in 2018, according to Patrick Newcomb, a director at Fuse Research Network in Needham, Mass.
The glory days for approaches like these are probably over, says Antti Ilmanen, an investment strategist at AQR Capital Management in Greenwich, Conn. He’s the author of a new book, “Investing Amid Low Expected Returns.”
Mr. Ilmanen’s volume isn’t beach reading; it’s full of subtleties and complexities. But its message is stark and simple. With many assets still near all-time highs, future returns will likely be lower, says Mr. Ilmanen—across the board, for traded and untraded investments alike.
Yes, I know: That’s what many market commentators have been saying for years. And the markets kept going up anyway. Isn’t this just more negativism?
Nope. High recent returns make you feel rich, naturally leading you to extrapolate further gains. But you’re just borrowing them from the future. The more highly valued your holdings are, the lower their return is likely to be down the road.
To see why, let’s pretend you own a hypothetical bond. To keep things as simple as possible, imagine a plain $1,000 bond paying 3% a year for 10 years.
If you buy it for $1,000, this bond’s $30 annual interest would earn you a 3% yield. If, however, you pay $1,200 for a bond with the same terms, your $30 interest yields you 2.5%.
The higher the price you pay, the lower your return on the bond; there’s no way around it.
Unlike with a bond, a stock’s future income stream can grow. If it doesn’t meet expectations, though, the same general principle applies—without any assurance of getting your original investment back in the end.
To make general judgments of how expensive stocks are, Mr. Ilmanen uses a modified version of a measure developed by Yale University economist Robert Shiller. Mr. Ilmanen’s math indicates that U.S. stocks could return less than 3% annually, after inflation, over the next five years or more—among its lowest estimates ever. Although you can’t use such data to tell exactly when stocks are overpriced, says Mr. Ilmanen, “the message is that the prospect of low expected returns should be taken seriously.”
What can investors do? A few suggestions are obvious.
Save more, spend less (especially on investment-management fees).
Avoid chasing illiquid assets—some of which, like private equity, are no longer definitively cheap relative to publicly traded stocks, Mr. Ilmanen’s research suggests.
Look outside the U.S., where stocks are considerably cheaper.
Above all, don’t take bigger gambles to try catching up. Riskier holdings, such as untraded equity and bonds, have looked safe during the bull markets of the last decade. But they could deliver “bad returns in bad times” that aren’t as fleeting as early 2020, says Mr. Ilmanen.
“If we get rising yields [as interest rates go up], more valuations will be challenged,” he says. “If you take less risk now, not more, you will be able to swing at the fat pitches when they come.”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: April 15, 2022
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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Government spending, including Biden’s Inflation Reduction Act, has helped drive a gap between clean-energy spending and fossil-fuel investments
3 min
Investments in solar power are on course to overtake spending on oil production for the first time, the foremost example of a widening gap between renewable-energy funding and stagnating fossil-fuel industries, according to the head of the International Energy Agency.
More than $1 billion a day is expected to be invested in solar power this year, which is higher than total spending expected for new upstream oil projects, the IEA said in its annual World Energy Investment report.
Spending on so-called clean-energy projects—which includes renewable energy, electric vehicles, low-carbon hydrogen and battery storage, among other things—is rising at a “striking” rate and vastly outpacing spending on traditional fossil fuels, Fatih Birol, the IEA’s executive director said in an interview. The figures should raise hopes that worldwide efforts to keep global warming within manageable levels are heading in the right direction, he said.
Birol pointed to a “powerful alignment of major factors,” driving clean-energy spending higher, while spending on oil and other fossil fuels remains subdued. This includes mushrooming government spending aimed at driving adherence to global climate targets such as President Biden’s Inflation Reduction Act.
“A new clean global energy economy is emerging,” Birol told The Wall Street Journal. “There has been a substantial increase in a short period of time—I would consider this to be a dramatic shift.”
A total of $2.8 trillion will be invested in global energy supplies this year, of which $1.7 trillion, or more than 60% will go toward clean-energy projects. The figure marks a sharp increase from previous years and highlights the growing divergence between clean-energy spending and traditional fossil-fuel industries such as oil, gas and coal. For every $1 spent on fossil-fuel energy this year, $1.70 will be invested into clean-energy technologies compared with five years ago when the spending between the two was broadly equal, the IEA said.
While investments in clean energy have been strong, they haven’t been evenly split. Ninety percent of the growth in clean-energy spending occurs in the developed world and China, the IEA said. Developing nations have been slower to embrace renewable-energy sources, put off by the high upfront price tag of emerging technologies and a shortage of affordable financing. They are often financially unable to dole out large sums on subsidies and state backing, as the U.S., European Union and China have done.
The Covid-19 pandemic appears to have marked a turning point for global energy spending, the IEA’s data shows. The powerful economic rebound that followed the end of lockdown measures across most of the globe helped prompt the divergence between spending on clean energy and fossil fuels.
The energy crisis that followed Russia’s invasion of Ukraine last year has further driven the trend. Soaring oil and gas prices after the war began made emerging green-energy technologies comparatively more affordable. While clean-energy technologies have recently been hit by some inflation, their costs remain sharply below their historic levels. The war also heightened attention on energy security, with many Western nations, particularly in Europe, seeking to remove Russian fossil fuels from their economies altogether, often replacing them with renewables.
While clean-energy spending has boomed, spending on fossil fuels has been tepid. Despite earning record profits from soaring oil and gas prices, energy companies have shown a reluctance to invest in new fossil-fuel projects when demand for them appears to be approaching its zenith.
Energy forecasters are split on when demand for fossil fuels will peak, but most have set out a timeline within the first half of the century. The IEA has said peak fossil-fuel demand could come as soon as this decade. The Organization of the Petroleum Exporting Countries, a cartel of the world’s largest oil-producing nations, has said demand for crude oil could peak in developed nations in the mid-2020s, but that demand in the developing world will continue to grow until at least 2045.
Investments in clean energy and fossil fuels were largely neck-and-neck in the years leading up to the pandemic, but have diverged sharply since. While spending on fossil fuels has edged higher over the last three years, it remains lower than pre pandemic levels, the IEA said.
Only large state-owned national oil companies in the Middle East are expected to spend more on oil production this year than in 2022. Almost half of the extra spending will be absorbed by cost inflation, the IEA said. Last year marked the first one where oil-and-gas companies spent more on debt repayments, dividends and share buybacks than they did on capital expenditure.
The lack of spending on fossil fuels raises a question mark around rising prices. Oil markets are already tight and are expected to tighten further as demand grows following the pandemic, with seemingly few sources of new supply to compensate. Higher oil prices could further encourage the shift toward clean-energy sources.
“If there is not enough investment globally to reduce the oil demand growth and there is no investment at the same time [in] upstream oil we may see further volatility in global oil prices,” Birol said.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
