Between 2010 and 2020, stocks and bonds have been on an amazing run.
But annual returns won’t be as high over the next decade, so cool your expectations, professional investors warned.
The 2010-2020 period may be the only decade without a recession in U.S. history and the highest S&P earnings growth in U.S. history, said Matt Topley with Fortis Wealth in King of Prussia.
While the decade was the longest economic expansion ever recorded, it has also been the weakest of the post-WWII era, according to Wells Fargo’s annual economic outlook.
The decade also didn’t beat out the best for stock returns.
“We are still well behind the 1987-2000 bull run,” Topley noted.
As a result, the stock market is expensive, but nothing like the 1999-2000 bubble, and the overvaluations in today’s markets are private equity and private lending, Topley said.
Good news: A U.S. economic recession isn’t on the horizon for 2020.
In fact, this current expansion could continue for many more years, according to one prominent market forecaster.
“We are less vulnerable to shocks in 2020 because there are few imbalances in the economy,” wrote Torsten Slok, chief economist with Deutsche Bank, in a recent note to bank clients.
“Because of the experience in 2008-2009, households and companies have been hesitant to spend too much money and take too much risk. As a result, 10 years into this expansion, discretionary spending is still below its historical average,” he added, highly unusual compared with previous cycles.
“The lack of willingness to spend on consumer durables” and capital expenditures is also a reason that this expansion has been so weak, he added, and “also the reason why this expansion could continue for many more years.”
Topley of Fortis Wealth made some predictions for 2020 and beyond: “The biggest mistake investors make is thinking the next decade will look like the previous 10 years. Large-cap growth stocks crushed all other asset classes in 2010s, leaving them at record spreads in valuations versus value stocks and international stocks. The next 10 years will reward a diversified portfolio.”
Retirees are in a predicament: Stocks are trading at high levels and interest rates are low, so savings accounts aren’t producing income. Meanwhile, Americans are living longer, without pensions, and many will need some form of long-term care. After a tremendous run, Wall Street has tempered expectations for stock and bond market returns for the next decade.
Vanguard tempers forecasts
Vanguard, the Malvern-based mutual fund giant, with nearly $6 trillion in assets, has slightly lowered its projected returns.
“We have to get mentally and financially prepared for lower returns in the next 10 years,” Topley said.
Vanguard last May issued 10-year forecasts for U.S. equity returns of 4% to 6% annually and U.S. aggregate bond returns: 2.5% to 4.5% a year.
This month, Vanguard issued slightly lower forecasts for stocks to 3.5% to 5.5% annually and for bonds to 2% to 4% a year over the next decade. The full forecast is available on Vanguard’s website.
In addition, 2018 was a year in which stocks, bonds, and commodities all fell in price, prompting record high volatility, while 2019 was the opposite, with all asset classes showing high returns and volatility at record lows. This coming year 2020 will see that volatility return, Topley believes.
“The S&P averages a 14% pullback per year, with 5% to 10% pullbacks being commonplace, we will see those return in 2020,” he said.
“Bull markets end when everyone is ‘all in’ and the last-stage euphoria sets in,” he added, but “we have not seen that yet in U.S. markets.”
The ‘college economy’
Americans started the decade in 2010 with unemployment at near 10%. Now it’s in the 3% range. The S&P 500 has nearly tripled. Home prices have appreciated by 34%.
But whether Americans prospered during the longest economic expansion in modern history depended a good deal on their level of education. A new survey by Credible found that, compared with high school graduates, Americans with a bachelor’s degree or higher were:
Almost three times as likely to own stocks or bonds
88% more likely to have purchased a home
71% more likely to have saved for retirement
58% more likely to have maintained health coverage
That may explain why the recovery after the Great Recession handed out winnings unevenly — and why the popularity of big government spending continues.
“A significant chunk of U.S. economic outperformance over the past five years has been about fiscal stimulus,” said Lyn Alden, a financial adviser and analyst based in Absecon, N.J. “For the first time in modern history, the U.S. deficit is widening to a large deficit during a nonwartime, nonrecessionary period. The debt as a percentage of GDP grew from 62% to 106% over the past decade.”
Although large U.S. deficits aren’t unusual, inflation often follows. More concerning, says Ali Wolf, director of economic research at Meyers Research, is the potential for less investment in the economy, and high levels of government debt “could hurt growth either through increased risk of a fiscal crisis or hindering our ability to respond to future downturns.”
“Today’s high levels of debt are pulling away from meaningful investments in the country even with low-interest rates. Roughly 8% of the budget goes toward servicing interest payments and that percentage will rise as our debt increases. The government will struggle to refinance, repurchase, and pay off the debt if interest rates were to rise again.”
Retirees and other investors feel they’re paying more for everyday items, especially health care and tuition, even though the Federal Reserve claims inflation is hovering around 2% annually.
Jim Bianco, of Bianco Research, wrote on Nov. 29: “The Fed instituted its inflation target in January 2012, targeting a year-over-year [rate] at 2%. The Fed can contort themselves all they want but they have not been successful in hitting this target. Looking forward, inflation expectations suggest the Fed will struggle to hit their 2% goal.”
Bond investor David Kotok of Cumberland Advisors said measures of inflation he tracks mostly confirm that view, although there are indications that a little more inflation could be forthcoming in 2020.
“We think some more inflation could show up in 2020 if we didn’t have the Trump trade war dynamics interfering with economic cycles. Instead, we have sluggish capital expenditures as business agents defer decisions because of high and rising Trump uncertainties,” Kotok said.
Invest away from politics
UBS forecasts that the U.S. central bank’s Federal Funds interest rate will be lowered to 0.9% in 2020, and that means “it’s a great time to refinance a mortgage,” said Julie Fox, market head for Northeast Private Wealth Management at UBS.
“Clients are also asking how is the U.S. election impacting investors? What we say is you can brace for volatility in certain sectors and pick investments less dependent on political outcomes,” Fox said, including emerging markets, particularly U.S. dollar-denominated sovereign debt, gene therapy companies, and equities in markets such as Japan, China, and Brazil.
In addition, she said, “the drivers are intact for a continued rally in the price of gold.”