There is a confluence of factors causing the current bout of market volatility, Prudential Financial experts noted at the firm’s 7th Annual Global Economic and Retirement Outlook event in New York.
Besides prolonged geopolitical instability and uncertainty about interest rates both in the U.S. and abroad, markets have yet to adjust to what appears to be a prolonged plunge in oil prices. There is even emerging concern that deflation in the Euro and other currencies could dampen growth in key economies, said panelist John Praveen, managing director and chief investment strategist for Prudential International Investments Advisers.
Whatever the cause, broad market indices all plunged several percentage points during the first trading days of the year. As of January 7, the Wilshire 5000 was struggling to break the longest string of negative trading days since December 5, 2013, concluding five negative trading days in a row. The Wilshire 5000 had a five trading-day loss of -917.27 points, or -4.17%, leading up to January 6, for a paper loss of approximately $1.05 trillion.
Praveen suggested that institutional and individual investors can expect to face a year with some unfamiliar market conditions. For this reason it’s especially important to be knowledgeable about one’s exposures and risk tolerance heading into the New Year, he said.
“Global interest rates are really at prolonged low levels that we’ve never seen before,” he explained. “The most recent bout of oil price volatility aside, inflation had already been low in the U.S. and abroad. This is a new deflationary impulse in the world that will challenge growth and cause some discomfort in the global markets.”
But Praveen and other Prudential experts were quick to point to positive indicators for 2015—not least among them the strong relative economic performance of the United States. Even with the prospect of a modest Federal Reserve-driven interest rate hike as soon as June, Praveen says most institutions involved in market forecasting predict solid equity performance for the year as a whole.
Srinivas Reddy, senior vice president and head of full service investments for Prudential Retirement, says 2015 will be a revealing test of the importance of working with a financial adviser or investment consultancy to help one avoid bad investing habits in times of market volatility.
“For individuals especially, one of the most important pieces of advice at a time like this is that low yields are a more challenging problem if you’re not saving enough,” Reddy says. “For retirement specialists, the answer is to get people to start saving early in default investments that automatically adjust for age and risk tolerance. This will be a year that highlights the importance of auto-escalation in retirement plan design, because again, the answer to a lot of these questions has to be to save more.”
Reddy says that 2015 may also become the year that retirement investors—individuals and pension funds—start to grasp the troubling financial implications of substantially increased longevity. This is in part because pension funds are adopting new mortality assumptions from the Society of Actuaries, leading to substantial jumps in anticipated benefit liabilities for employers.
“I have seen studies predicting that every decade moving forward will bring at least another year of average longevity,” Reddy says. “This has huge implications for quality of life and health care for almost everyone. It’s especially pressing because of the decline in pensions and guaranteed retirement income, and because more responsibility rests on the shoulders of individual savers.”
Quincy Krosby, chief market strategist for Prudential Annuities, says Prudential’s basic piece of advice for 2015 is that “boring is good.”
“That’s what we’re telling our clients for the most part,” Krosby said. “We’re telling them to be patient and see how we can get through this tough period. We have seen every time the Fed has pulled back on quantitative easing, despite the renewed economic strength, this leads to some movement in the markets. It’s not the first time the markets got nervous and dropped a bit.”
Like others on the Prudential outlook panel, Krosby said she expects the Federal Reserve to be extremely careful about spooking the markets through overly aggressive interest rate hikes. Even if the Fed raises rates in June, it will be a small increase and one that the markets can hopefully absorb without too much pain, she said.
“If the 10-year Treasury yield rises substantially, I think you will see a selloff across the board for bond-like assets,” Krosby noted. “But whatever happens, money will continue to flow into U.S. markets, given the search for yield and the emerging worries about European and global sluggishness.”
Reddy concluded by saying he is hopeful about the prospects of global and emerging markets, despite some initial hurdles for 2015. He also said he is “more fearful for retirement plan participants than any other investor type right now.”
“Many of these people are savers, not investors. Many of them are invested mainly in fixed-income products that lack the growth potential they desperately need.” he said. “All of this uncertainty can be expected to cause even more hesitation from individual retirement investors.”