During a presentation this morning, Nuveen’s chief equity strategist Bob Doll offered his longer-term forecasts alongside his predictions for 2014. Here are his five long-term themes:
- Economic power and financial wealth continue to shift from developed to emerging world (although cyclical issues have interrupted this)
- Emerging market consumers set the pace for global growth with an assist from the United States
- Reflationary efforts continue to overpower deflationary forces
- United States enjoys modest, but acceptable growth; European volatility continues; China continues soft landing, with imbalances
- Investors experience modest long-term returns
That last bullet is concerning for pension fund managers and anyone else investing for retirement with set financial goals and a target date in mind. Doll thinks 6% to 8% average annual returns in the U.S. stock market over the next decade are likely considering the massive run-up we’ve seen in recent years.
More and more, experts are telling us that the days of 10%+ average annual returns in the stock market are behind us. Or at least they’re a long way’s off.
“[S]tocks are currently at levels that we estimate will provide roughly zero nominal total returns over the next 7-10 years, with historically adequate long-term returns thereafter,” said John Hussman of Hussman Funds.
And Hussman isn’t even the most bearish.
“Fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation,” said GMO’s Ben Inker in November. “For those interested in the broader U.S. stock market, our forecast for the Wilshire 5000 is a bit worse, at -2.0%, due to the fact that small cap valuations are even more elevated than those for large caps.”
Many point to Robert Shiller’s legendary cyclically-adjusted price-earnings (CAPE) ratio to support their argument for sub-par returns. CAPE is calculated by taking the S&P 500 and dividing it by the average of 10 years worth of earnings. If the ratio is above the long-term average of around 16x, the stock market is considered expensive. Currently, CAPE is way above it’s long-term mean at 25.4x.
But keep in mind that Doll, Hussman, and Inker are not saying that they expect each upcoming year to deliver the same low returns. They’re all talking about average returns.
“[T]oday’s valuations for the U.S. stock market are a temporary issue that will be resolved either through a relatively quick bear market or a longer period of more or less flat returns — as the last 13 years, for all of their periodic excitement, have turned out to be,” said Inker.
God forbid we see the stock market crash. But in the frame work of these long-term forecasts, a crash would offer the attractive entry point that would lead to much better average annual returns.
“Crashes create opportunity and kings will be made during the next one,” said Reformed Broker Josh Brown.
For your reference, here are Doll’s long-term market forecasts.