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Economy: On The Trading Floor

The outlook is a mixed bag for both financial planners and stockbrokers, as well as the people who rely on them to manage their money. In the short-term, revenues will rise faster than GDP, reflecting growth in disposable personal income, increased employment, a 5.4 percent savings rate and the recent wealth gains of many high net worth individuals.

Rising interest rates will cause investor uncertainty to increase in 2016, which will lead to short-term increases in trading volumes but may discourage retail investors over the long term. Nonetheless, the long-run forecast for stockbrokers is good but not exuberant, in part because two major market reversals since 2000 did lasting damage to people’s opinion of equities as an investment.

More individuals are entering their retirement years, which argues for asset allocations that give heavier weight to bonds rather than stocks – or at least toward income stocks rather than growth stocks. Of course, the view of real estate as an investment has darkened somewhat, which could tip the balance back toward stocks even as people become more comfortable with the overall state of the economy and their level of personal debt.

Increases in longevity, the increasing median age of the population and concerns about the viability of Social Security and other pensions favor stockbrokers and financial planners. People will take more responsibility for their own retirement incomes, and their growing investments will increase revenues derived from asset management and commissions.

Going forward, increases in the average retirement age – and increases in labor force participation by persons 65 and over – also should benefit financial planners and stockbrokers.

Major long-run challenges include more competition from banks, insurance companies and online discount brokers that promote do-it-yourself financial planning.

The growing use of alternative trading systems will cause the industry to become more focused on retail investors over institutional investors. The industry will become more dependent on fees charged based on the value of assets under management rather than commissions. This ongoing shift will help stabilize industry-wide revenues – and profits – because fees are earned whether or not stocks are traded.

Consolidation and a slowing of new companies in the financial planning market are increasing industry concentration. Economies of scale created by new technologies will encourage further consolidation. As consumers become more familiar with online and mobile banking, they will be more prone to engage in the online or mobile trading of stocks and more apt to manage their own accounts.

As of mid-2015, it appears that equities are modestly overvalued whereas treasuries and bonds generally are substantially overpriced. Assuming that the financial markets and the overall economy continue to heal, the outlook for equities is slightly positive, which implies that trading activity probably will neither rise nor fall significantly.

Sustained economic recovery will increase the volume of initial public offerings as well as mergers and acquisitions, which bodes well for stock prices. In many industries, relentless competition and new regulations will spur merger and acquisitions activity. Slower growth in corporate profits as well as the lagged effects of the Federal Reserve’s winding down of bond purchases will temper stock price gains in 2016.

The Federal Reserve will raise short-term interest rates in 2016, with long-term market interest rates also rising. Interest costs are not expected to erode companies’ net earnings very dramatically, however. That lends stability to stock prices – even for debt-heavy companies – at least in the short term.

On the negative side, the dollar’s high value might discourage foreign investors from purchasing U.S. equities. Also, growing recognition that the U.S. real estate market is in a sustainable recovery may cause some investors to put more of their money into real estate, which could temper gains for other asset classes, including equities.

Of course, extreme volatility in either the economy or stock prices could cause such funds to remain in safer, more liquid types of investments, such as cash or very short-term CDs. On the other hand, in the short-term, volatility can encourage investors to seek out professional financial advice, but extended periods of volatility discourage participation in the stock market by small retail investors. 

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