Monday, November 25, 2019
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Five years of 18.5% average annual returns
Stock market forecasters seem pretty comfortable predicting lackluster, below-average returns for years to come. But history shows they may be dead wrong.
Earlier this month Morgan Stanley strategists stole headlines after publishing a report saying a generic 60/40 portfolio (60% stocks and 40% bonds) would produce a measly 2.8% in average annual returns over the next decade. That prediction assumed just 4.9% in average annual returns from the S&P 500 (^GSPC).
Last week, UBS Global Wealth Management strategists made a similar call: “Returns for the most part are likely to be much lower than in the last decade – we expect 4%–6% nominal returns per year in developed markets in local currency terms.“
Bank of America Merrill Lynch too estimates modest annual returns close to 6% over the next decade. Meanwhile, the money managers at GMO see large-cap U.S. stocks falling 3.9% on average over the next seven years.
So, what gives? Many point to the duration of the largely unhindered market rally we’ve seen since the March 2009 lows, which has stretched most valuation metrics to above average levels.
Enter BMO’s Brian Belski who offers a completely different view, suggesting annual returns could balloon from here.
“We firmly believe that we are in the midst of a secular bull market,” Belski wrote in a note to clients on Thursday.
He compared today’s market with what happened in the past (emphasis added): “...looking back at the prior two post-war secular bull markets in 1948-68 and 1982-00, the S&P 500 index logged an average [compound annual growth rate] of 14.3% during the first 11+ years, essentially in line with the gains posted so far in this current bull market (14.2%). A period of stagnation and softening returns typically occurs between years 11 and 13, with the average CAGR for the S&P 500 dwindling to less than 4% for this 2+ year period (Exhibit 13). Following this stagnation stage, the subsequent five years coincide with the strongest price returns with the S&P 500 posting an average CAGR of 18.5% during this time.”
And this is where you point out that an average based on a sample size of two is not very compelling. And even if the sample size were higher, past performance is no guarantee of future results.
BUT the point is acceleration from here would be far from unprecedented. It’s something to consider as you consider your long-term investment strategy.
What were the best and worst companies of 2019? CLICK HERE
What to watch today
8:30 a.m. ET: Chicago Fed National Activity Index, October (-0.20 expected, -0.45 in September)
10:30 a.m. ET: Dallas Fed Manufacturing Activity, November (-3.5 expected, -5.1 in October)
Uber refused license to continue operating in London [Yahoo Finance UK]
LVMH to buy luxury jeweler Tiffany for $16 billion [Yahoo Finance UK]