Adaptation to an Evolving Market

In the latter part of March 2012, despite the growing concerns of a debt ridden Euro, the Dow Jones Industrial Average has been able to keep itself above 13,000.  Even with the market rally, the struggling mortgage industry lowered the 30 year fixed mortgage below 4% again.   With legitimate foreign concerns and a troubled housing sector, the stock market has been able to sustain higher numbers thanks to both the watchful eye of Bernanke and the Feds promise to hold interest rates low through 2014.  What does that mean for the financial future of the United States?  We don’t know, and what’s even scarier, we have no way to even begin to understand. 

Why?  Simple, this has never happened before.  Historically, stock analysts have been able to gauge the financial climate by referencing similar time periods in the past.  That is not the case today.  With 5 trillion dollars added to our national debt in order to “sustain” a globally feared financial correction, there is no past financial time period to reference anywhere near this magnitude. 

I believe that the market is evolving and no one has any idea of the end result.  Just as species or landforms evolve over time, so does the market.  With the Federal Stimulus that started in 2008, all of the past rules of diversification went out the window.  This has caused the market to respond unpredictably, sprouting a new branch of financial evolution.  Most financial professionals are of the opinion that because of the financial crisis in 2008, volatility and Federal spending will continue for the next several years in order to stabilize the market.  Finance 101 says that you can never spend your way out of debt.  Evidently, some people need to review the basics.   

I think that the market will continue to present conflicting data; and, this constant conflicting data will eventually evolve into the norm.  For example, the top US pension servicing corporations just recently announced that the total pension fund deposits fell $320 billion short in 2011.  The common sense reaction is “if the Dow is over 13,000, how can total pensions be underfunded by that much”?  What do you think any financial planner prior to 2006 would say if you told them that by 2012 approximately $5 trillion would be added to our national debt due to Federal stimulus aimed to protecting our markets?  Then you were to add that the bad debt with Greece was going to be “forgiven” by a general consensus of the Euro Nations.  I’m sure we both agree that it wouldn’t be good.

For these reasons alone I feel there will be even a greater need for financial products utilizing annual reset and indexing.  Products such as indexed annuities and indexed universal life will allow investors to take a cautious step forward without worrying about falling off of a cliff (taking a big hit in the market).  With an evolving market, you should hope for the best, but always be prepared for the worst.  Today many surveys are showing that the general population is skeptical about our financial sector.  This skepticism can be interpreted as mounting confusion that is causing many investors to stop trying to understand, which means their money will likely need to be protected more than ever.   I feel as time goes on investors will increasingly start exploring financial products that have laws in place to protect their money from leveraged assets, thus being able to avoid market volatility.  Financial guarantees and lifetime income will likely be sought after more than ever before.  Moderate returns can very easily be a remedy from taking a step backwards; helping insure that the investor’s timeline will be met.  Investors know one thing for sure; another lost decade is not going to cut it.