America is going through a substantial deleveraging process, says Tyler Mordy, director of research and co-CIO for Hahn Investment Stewards.
If you look at the financial sector, they’re back at leveraging ratios that we saw pre-credit crisis. And if you look at the private sector, we’re down about 25% in terms of overall credit.
“It’s a renewal phase and is paving the way for a more self-sustaining recovery,” he says. “If you look back at history, these post-financial crisis periods just take some time to work out.”
Though markets seem tough now, he adds you have to look at history to get perspective on current events and phases. By examining similar situations throughout history and how they played out, you can also provide some signposts for your clients.
This is especially important because words like unprecedented have been used increasingly in the last few years. Clients feel today’s volatility is worse than it’s ever been, so often get frustrated, impatient and stressed.
But Mordy says, “The volatility [we’re experiencing now] isn’t unparalleled. There have been major deleveraging periods before, such as the what occurred in the ‘30s in the U.S. and the original Great Depression in the 1800s.”
He adds people tend to extrapolate when faced with uncertainty, however. Even when they’re unsure of how markets will move, they make negative forecasts that don’t account for possible upward trends.
“If things have been volatile for the last three-to-five years, they think they’ll continue to be unstable. And right now, there’s widespread predictions of a renewed global financial crisis.”
His prediction is we’re currently in a slow-growth phase; historical data suggests GDP is just going to grow around 1%-to-2% for a while, rather than dip and cause another recession.
“Just because it’s a deleveraging, slow-growth environment doesn’t mean that you can’t thrive,” says Mordy. Since safe assets are short in supply, he’s helped clients switch out of traditional safe haven markets as they don’t offer risk-free returns any longer.
He instead invests in emerging market debt and other global assets, as well as in industries and sectors that aren’t correlated with slow markets. For aging clients, he also invests in income products since they’re in high demand.