Pickings look rather slim for investors over the next decade, according to the results of Morningstar’s annual survey of financial market forecasts.
Certainly much slimmer than the extremely strong returns for U.S. stocks for the last decade. During that period the Standard & Poor’s 500 has gained an average annual return of 13.50% (with dividends reinvested. It’s 11.35% without reinvested dividends. For the last decade the total nominal return on the S&P 500 (with dividends reinvested) was 215.97%.) The Bloomberg Barclays U.S. Aggregate Bond Index has returned 3.5% a year.
For the decade ahead Morningstar found forecasts of half that or less. Blackrock, for example is looking for nominal 6.1% average annual returns over the decade for large-cap U.S. stocks like those in the S&P 500. (Since these are nominal returns you have to subtract the inflation rate.) JPMorgan Chase sees nominal average annual returns of 5.6% or U.S. stocks. Vanguard projects nominal U.S. stock returns of an annual 3.5% to 5.5% range during the next decade. And those are the optimists. Morningstar itself is forecasting just 1.7% nominal average annul returns for U.S. stocks in the decade. Grantham Mayo Van Otterloo sees 4.4% real (that is inflation-adjusted) average annual returns for the period for U.S. large cap stocks.
Not only are those projected returns for the next decade startlingly lower than the nominal average annual returns over the last decade, they are distressingly lower than the results over longer periods. From 1950 to the turn of 2020 the S&P 500 returned a nominal annual average of 7.69% (without reinvested dividends) and 11.13% (with dividends reinvested. The huge difference is that the S&P 500 companies used to pay higher dividend yields.)
And remember that these, with the exception of the Grantham forecast, are for nominal returns. If inflation should kick higher in the next decade than in the last one, real, inflation-adjusted returns will be even lower looking ahead than for the decade we’re just completed.
The results of Morningstar’s survey bring two questions to my mind.
First, how likely are these projections to be on the mark? They are only projections, after all. What can we see in the real world now that suggests they will be right or wrong? Too high, too low, or just right?
Second, if upon reflection, you decide that these projections are close to the mark, then what do you do about it? Are there steps to take now or as the decade develops to guarantee participation in those projected returns or to beat those results?
I’ll be turning this post into a Special Report tomorrow on my JubakAM.com subscription site with my answers to those two questions making up Parts 2 and 3.