{"id":12695,"date":"2023-09-18T13:47:47","date_gmt":"2023-09-18T13:47:47","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12695"},"modified":"2024-01-10T17:14:58","modified_gmt":"2024-01-10T17:14:58","slug":"how-the-end-of-the-easy-money-era-impacts-investors","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/how-the-end-of-the-easy-money-era-impacts-investors\/","title":{"rendered":"How The End Of The “Easy Money” Era Impacts Investors"},"content":{"rendered":"\n

What the End of Easy Money Means for Investors<\/strong><\/p>\n\n\n\n

There\u2019s a popular narrative in the stock market that it was the Federal Reserve \u2013 and not much else \u2013 that powered the strong stock market returns in the decade of so following the 2008 Global Financial Crisis. The thinking goes that because the Federal Reserve kept interest rates at the zero bound for years following the 2008 financial meltdown (and again following the pandemic), and because the central bank expanded their balance sheet with quantitative easing measures over the same period (see chart below), investors were \u2018basically forced\u2019 to flood into risk assets.1<\/sup><\/p>\n\n\n\n

The Fed\u2019s Balance Sheet \u2013 Expands in 2008, Soars in 2020<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/strong><\/em><\/figcaption><\/figure>\n\n\n\n

Steer Clear of These 8 Financial Mistakes!<\/a><\/span><\/strong><\/p>\n\n\n\n

Everyone wants a stress-free retirement, but challenges, obstacles, and mistakes often get
in the way. While the market presents many unknowns, I believe there are eight common mistakes that many investors make when planning for retirement.<\/p>\n\n\n\n

In our free guide, 8 Retirement Mistakes to Avoid<\/a><\/span><\/em><\/strong>, all Mitch on the Market<\/em> readers will get insight on how to navigate through common mistakes, such as trying to time the markets, falling for different fraud schemes, changing strategies too often, and more to ensure a stress-free retirement.<\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more, click on the link below to get your free copy:<\/p>\n\n\n\n

Learn About the 8 Retirement Mistakes to Avoid!3<\/sup><\/a><\/span><\/strong><\/p>\n\n\n\n

I\u2019m not saying this line of thinking is wrong. Easy money no doubt supercharged capital flows into stocks and other risk assets. Investors in search of yield had limited options in the bond markets, and massive amounts of liquidity meant more money was sloshing around in the capital markets. Much of it made its way into stocks.<\/p>\n\n\n\n

What gets left out of this narrative, however, is any role that rising corporate earnings may have played in the stock market\u2019s ascent. That\u2019s where I take issue. Aggregate S&P 500 earnings-per-share grew steadily from 2009 to 2015, contracted slightly, and then trended sharply higher up until the end of 2019. Aggregate EPS for S&P 500 companies more than doubled in this period, with profit margins reaching their highest point in decades by 2022. Zooming out even further, we know that year-over-year operating EPS growth averaged 8.4% from 2001 to 20224<\/sup>, which is almost perfectly in-line with the S&P 500\u2019s 8.71% annualized return over that same period.5<\/sup> In short, stocks were propelled by much more than just the Fed.<\/p>\n\n\n\n

I think a better way to frame the Fed\u2019s easy money impact on the stock market is to view it in terms of market return (beta) versus excess return (alpha).<\/p>\n\n\n\n

I\u2019ve made the argument above that the Fed\u2019s easy money policies \u2013 combined with many years of steady earnings and economic growth \u2013 have been driving the stock market higher since 2008. Valuations were low when the Fed engaged in aggressive monetary easing, which became a \u2018rising tide that lifted all boats\u2019 in the stock market. Beta ruled, and the differentiation between individual stocks was lower than average. Investors did not need to do much beyond owning a broad set of stocks in order to do well. In other words, high beta delivered \u2013 the average annual return for the S&P 500 was 15% from 2010 to 2021.<\/p>\n\n\n\n

Looking ahead, tighter money (chart below) may mean lower beta, which sets the stage for alpha to play a bigger role in portfolio returns going forward.<\/p>\n\n\n\n

Year-over-year % change in Fed\u2019s Balance Sheet<\/strong><\/em><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis6<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

In the decade following the Global Financial Crisis, the Fed\u2019s main objective was to support economic growth. Inflation was an afterthought.<\/p>\n\n\n\n

The current environment is, of course, just the opposite. With the Fed making decisions almost unilaterally focused on inflation, they are likely to be less supportive of growth \u2013 which may factor as a headwind for risk assets. What\u2019s more, valuations are currently at relatively high levels, which means the starting point for tighter monetary conditions is one where stocks aren\u2019t cheap.<\/p>\n\n\n\n

Given this setup and looking out over the next decade, investors should not expect the same 15% annualized returns stocks experienced from 2010 to 2021. Lower beta does not necessarily have to mean lower portfolio returns, however. It just means investors and managers will likely need to generate more alpha in portfolios, which plays nicely into a central tenet of our investment approach here at Zacks.<\/p>\n\n\n\n

Another investment strategy that could help you navigate the market\u2019s ups and downs is familiarizing yourself with common investing mistakes.<\/p>\n\n\n\n

I believe there are eight common mistakes that you should be aware of. In our free guide, “8 Retirement Mistakes You Need to Avoid<\/a><\/strong><\/span>,” we discuss the most common investing pitfalls that, in our view, can foil your retirement plans, such as:<\/p>\n\n\n\n

\u2022 Is your portfolio too conservative?
\u2022 Trying to time markets
\u2022 Lack of diversification
\u2022 Switching strategies too often
\u2022 And more\u2026<\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more, click on the link below:<\/p>\n","protected":false},"excerpt":{"rendered":"

From the 2008 Financial Crisis through the pandemic, ultra-low interest rates and “easy money” lifted all stocks\u2014but that era is over.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12695","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12695","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12695"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12695\/revisions"}],"predecessor-version":[{"id":12699,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12695\/revisions\/12699"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12695"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12695"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12695"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}