We need to talk about the stock market for just a bit. And before some of you tune me out because investments aren’t your thing, at least read far enough that you learn a new term with which to impress your friends. Because not only do I want you to win financially, I also want you to have a strong game socially. So here’s your chance to run out ahead of the others in attendance at your next party. Prepare to see them impressed by you.
Victorian philosopher Herbert Spencer coined a term that happens to describe what we’ve seen in the stock market over the past few years. Economists call it a TINA Market. This translates to: ‘There Is No Alternative’ to stocks, or TINA. Now, it’s important to note that we’ve begun to move away from this market cycle recently, but it’s key to our understanding to knowing why the market is doing what it’s doing now.
Interest rates were very low for a very long time. A during that time, the stock market was criticized for being valued too highly – meaning stocks were deemed categorically expensive – since there was no suitable alternative to investing in stocks. Placing money into savings and CDs, however, was a non-starter because they paid almost zero interest. If you wanted to win as an investor, therefore, stocks were the only game in town during that time.
We’ll touch on why this may be, but it’s important to note that a market where stocks appeared to be the only way to invest means that a LOT of money moved into stocks, even when the risk premium may not have warranted their price. Taken further, this presented a scenario where investors continued to move more and more into stocks despite their potential to increase risk of loss. The result was the stock market moved up further and further.
This is no longer the case. Because of rising inflation, the Fed increased interest rates to slow down large parts of the economy. As a result, we’re seeing once very low interest rates now increased to a range that justifies taking a closer look. This means bank savings and money market rates are up, CD rates are much higher, bond yields are rising, and annuity rates are higher. Thus, some stock investors that were feeling compelled to invest more into stocks than they really cared to are now moving some of that money toward money market accounts, CDs, and annuities. When stocks were winning, investors bought more stocks, and stocks therefore kept winning. But now, there are solid alternatives to stocks where just a short time ago, the market was a TINA market.
So, what’s to make of this? In short, it’s no longer the case that one style of asset receives almost all of the money investors throw at the market. People are choosing to diversify a bit more than they had in the past. This will likely result in slightly lower returns in the stock market for the near future. Does that mean stocks are no longer a good investment? No, it just means that there are alternatives to stocks to consider now. In fact, stocks will continue to be the greatest hedge against long-term inflation, but in the shorter term, there will be some reshuffling of the economy as interest rates find their new normal.
So, while we’re no longer in a TINA Market, there are a lot of reasons to remain confident that stocks will do well long-term. After all, that’s where business innovation and long-term value are fostered and rewarded. With interest rates much higher than in the past, it’s now a time when traditional savers can get some rewards too.
Investors are wise to continue to diversify by owning some stocks and bonds in their portfolio, and also some annuities, and cash as well. Because while it’s great to benefit from current trends, history has shown that the tide can turn very quickly; when it does, you’ll want to own many asset types that meet the requirements of a suitable alternative.
Again, whether we’re still in a TINA Market or not, prudent diversification has served investors well over time, especially those who have shorter than ‘forever’ time horizons. Retirees may need to access funds for basic living expenses or larger purchases like an RV or a nursing home stay precisely when market and economic conditions change. With money market and other near-cash savings rates up, we can now consider some prudent adjustments.
TINA, it was great. We had a great run-up and some really good times. But it may be time for us to see other people now. I promise, it’s not you, TINA, it’s me.
Investment Advisory Services offered through Elevated Capital Advisors, LLC. An SEC Registered Investment Advisor.
This newsletter/commentary should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. There is no guarantee that any investment plan or strategy will be successful. All references to potential future developments or outcomes are strictly the views and opinions of the author and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets.