MoneyChimp.com

Estimated Future Stock Market Returns

Buy Stocks or hold stocks today go to sleep like Rip Van Winkle wake 10 years later – your estimated average annual return is:

0.53%

Global Investors Brace for a Cruel New World of Feeble Returns

Investors worldwide face a grim dawn of low returns across debt and equity markets as early as next year, with rich valuations and feeble growth seen pushing gains below historic norms. 

The value investor, with $77 billion of assets, issued bearish projections Monday: gear up for negative returns across most asset classes adjusted for inflation for the next seven years, with emerging-market stocks offering the main source of positive gains. U.S. stocks, for example, have posted a 14.3 percent annualized return over the last five years -- GMO projects a 4 percent annual decline for U.S. large-cap stocks over the next seven years.

Investors are keeping the faith despite rich valuations. Equity funds received a cool $8.8 billion in the week to Oct. 18, according to Bank of America Corp., citing EPFR data, spurred by exuberance towards U.S. stocks. 

DYI:

Speculators who think they are investors chasing past performance – just as dogs chasing cars – believing this is the new future performance.  Valuations drive long term returns not short term price movements.  Shiller PE¹⁰ is at nose bleed level of 31.42 and a sub atomic low dividend yield (S&P 500) of 1.87%!  Future returns are inversely proportional to valuations – higher the valuation lower your future return or lower the valuation higher future returns.  Simple as that!

Average valuations over long periods of time (DYI since 1871) are created by adding up (such as Shiller PE¹⁰⁾ and dividing by the number of time periods.  What we will have is periods of time valuations will be below and above their average creating the average.  Except for a brief period in 1991 and 2009 stocks as measured by Shiller PE¹⁰ have been above the mean since 1990 almost three decades!  A fair and reasonable assumption that stocks are long in the tooth for excessive valuations.  A drop below the mean for at least a decade is a very reasonable assumption.  Going back to our Rip Van Winkle example what would your return be if stocks ended 10 years from now at 12 PE¹⁰?  Answer: negative -2.74%!  This is more in line with DYI’s thinking and expectations.

Bottom line?  Hold onto your hats and cash better values are ahead.     

There’s one quantum of solace: Jeremy Grantham’s firm (GMO) projects U.S. inflation will return to its long-term average, suggesting that if weak core prices endure, the bar for real returns will be lowered.

DYI:

Solace?  Solace according to the Merriam Webster dictionary is defined: to give comfort or to make cheerful.  Since 1913 the average inflationary rate has been 3.24% and since 1970 has been 4.04%.  We all know – or at least we should know – the books are a bit cooked.  DYI has inflation average since 1970 in the 5% range.  At 5% your first dollar earned over the next 40 years loses 90% of its value.  Any wonder why it is so difficult to get ahead financially!  The real reason for the solace; our economy – the U.S. dollar – is debt based or fiat.  The only way bankers or investors are going to receive their rents (interest) in aggregate is by debasing (inflating) our currency by paying off their loans with cheaper dollars.  The Federal Reserve is nervous deflation will seep into the economy making it harder to pay their rents (interest) thus ramping up defaults which in turn reduces the money supply increasing deflation and increasing defaults.  Bottom line the Fed’s don’t give a crap about average Joe or Jane they are loyal to their member banks – the cartel – especially the big boys in New York City!     

 

DYI:

The calm before the storm?  You bet it is…When the tidal wave of lower stock prices will arrive all I can say it is now sooner than later.  DYI’s expectation from peak to trough over a multi-month period of time is a sell off in the magnitude of 55% to 70%!  As amazing as this seems a mere sell off of 50% will have valuation slightly above its mean providing insight to how massively the market is overvalued.

Once again; hold onto your hats and cash better values are ahead!    

DYI