Mutual Funds

What's in Store for the Next Decade

We expect increased inflation, higher interest rates and tepid home-price gains, but also steady advances in green energy and biotechnology.

From Kiplinger's Personal Finance magazine, January 2010

Uncle Sam: Bulking up

Bigger government, with more regulation and higher taxes, could mean slower-than-normal economic growth, higher interest rates and inflation, and continued weakness in the dollar.

The federal budget picture is ugly. Goldman Sachs projects that the U.S. will rack up $10.5 trillion in cumulative budget deficits over the next decade. Both Americans and overseas investors, who buy half of our Treasuries, will at some point balk at the low yields they get for lending to a profligate Uncle Sam. This will push interest rates up and the dollar down.

Gold is one form of insurance against a declining currency. You can buy gold through an exchange-traded fund, such as SPDR Gold Shares (GLD), or in mining stocks through a mutual fund, such as Vanguard Precious Metals & Mining (VGPMX).

The likelihood of higher income-tax rates bodes well for municipal bonds because tax-free income will become more valuable. But state and local budgets are a mess, so stick with high-quality issues and keep maturities short. For fund investors, Fidelity Intermediate Municipal Income (FLTMX) is a winner.

Changes in the tax code are usually bullish for tax-preparation firms. The big players are H&R Block (HRB) and Jackson Hewitt Tax Service (JTX). -- Andrew Tanzer

Interest rates: On the rise

The era of sweet deals for borrowers and raw deals for savers may last another year. After that, interest rates should start to creep up. The Federal Reserve Board will surely raise the short-term rates it controls to prevent inflation from taking root and to defend the dollar. Investors will demand higher long-term yields in response to inflation fears and a massive supply of new Treasury bonds.

The low rates of the past decade were an aberration. Since 1962, the median annual yield for ten-year Treasury bonds has been 6.44%. Rates will reach those levels again over the course of the next decade. But there’s no reason to fear a return of the double-digit interest and inflation rates that marked the late 1970s and early ’80s. A glutted real estate market, crowds of people looking for work, and the price-constraining impact of faster telecommunications and more-powerful computers will combine to hold down inflation.

In this kind of environment, keep maturities short on your fixed-income investments. Anchor your savings with a ladder of certificates of deposit or high-quality bonds maturing in one to five years. If you buy funds, consider steady Eddies, such as Vanguard Short-Term Investment Grade (VFSTX). And keep a healthy dose of Treasury inflation-protected securities. -- Jeffrey R. Kosnett

Tech: More personal

If technology is advancing too fast for your taste, brace yourself: The pace of innovation is only going to accelerate. The next few years will bring dramatic changes in how we browse the Web and use our mobile phones. A three-dimensional style of Web navigation -- made possible by speedier processors, broader Internet bandwidth, and a boost in computer and phone storage -- will become commonplace.

So instead of browsing online photos of that Porsche you want to buy, you’ll virtually enter a showroom, walk to the car, step inside, and check out the dashboard and controls. All you’ll miss is that new-car smell.

Your cell phone will replace your credit card. In parts of Asia and Europe, people already use their phones to pay for parking meters and vending machines. And security will be provided by multiple biometric scanners built into phones, including devices that examine your voice, retina and blood-vessel patterns.

Wireless operators such as AT&T (T) and Verizon Communications (VZ), which owns a majority of Verizon Wireless, are positioned to benefit from mobile-phone transactions.

T. Rowe Price Global Technology Fund (PRGTX) is well diversified, with large holdings in Apple (AAPL), maker of the iPhone, and Google (GOOG), the brains behind the Android operating system. -- Jeff Bertolucci

U.S. consumers: Tapped out

High unemployment, sagging wages and shrinking credit have transformed the U.S. into a nation of cautious spenders. Instead of buying what they want when they want it, Americans have grown gun-shy, searching for deals and restraining their urge to splurge on luxury items.

The “new frugality” isn’t likely to go away anytime soon. In fact, says Diane Swonk, chief economist at Mesirow Financial, consumers may be entering an era in which they have no choice but to spend within their means, mainly because of reduced home-equity borrowing and a contraction in credit-card use. That means consumer spending will stay sluggish by historical norms. Swonk sees spending rising by only 2.4% in 2010, versus the 5%-plus increases during the go-go years of the 1990s.

Cash in on the cautious-consumer trend by buying stocks of companies that cater to thriftiness. Top picks include retailers such as Wal-Mart Stores (WMT) and Family Dollar (FDO). Firms that market to homebodies, such as Netflix (NFLX), should also thrive. Finally, consider firms that manufacture staples, such as cereal maker General Mills (GIS) and consumer-goods giant Procter & Gamble (PG). They should be able to generate steady profit gains regardless of economic conditions. -- Laura Cohn

Homes: Leaner and greener

The housing bust, rising energy prices, clogged commuter routes and retiring baby-boomers are conspiring to upend the American dream. Instead of a McMansion in the far-flung suburbs with a big yard and a three-car garage, the most desirable homes will be smaller, “green” houses in pedestrian-friendly neighborhoods close to job centers.

Newly built homes have already shrunk a bit, as they did during the previous two recessions. But this time the trend will stick as boomers downsize and echo boomers enter the market. Younger buyers will have to scale back their expectations because of declining real incomes, tougher lending standards and less access to “Mommy money” as parents try to rebuild their retirement accounts. Don’t expect your home to be a source of fast-rising equity to borrow against. Most markets will see home-price appreciation that’s just a bit higher than the inflation rate.

Builders are already on the prowl for sites close to job centers. Companies that hold little land in inventory, such as Meritage Homes (MTH), MDC Holdings (MDC) and NVR (NVR), are likely to succeed. With their strong balance sheets, they are in a better position than other builders to buy properties selling at beaten-down prices. -- Patricia Mertz Esswein

1 |
• 2
• NEXT >

• Print
• Comments
• Email
• RSS