The folks at GMO have updated their quarterly asset class forecasts.
The forecasts are based on valuation, and they present GMO’s best estimate of the most likely annualized returns for stocks, bonds, cash, and timber over the next 7 years (it takes that long for valuations to reliably revert to means).
The bottom line, unfortunately, is that the outlook for almost every asset class except timber is lousy. Almost all the asset classes are significantly overvalued, which will likely lead to crappy returns going forward.
(Your favority pundit may be saying the market is “cheap” based on forward projected earnings, but, if so, he or she is either clueless or just clinging to a way to remain bullish. When stock-market valuations are assessed the right way–by smoothing earnings over a decade to mute the impact of the business cycle–stocks are clearly still overpriced. The only scenario in which bonds aren’t overpriced, meanwhile, is one in which we become Japan, with near-zero interest rates into the hereafter.)
The good news is that GMO’s analysis does conclude that there are a couple of pockets of opportunity, namely in high-quality US stocks (low debt, high cash flow) and emerging markets stocks, both of which are projected to have AVERAGE returns over the next seven years (about 6% a year before inflation). After the godawful returns we’ve had for the past 13 years, average returns would be quite refreshing.
Here’s the forecast chart from GMO. Click for a larger version.