"A 5% Yearly gain from the S&P 500 over the next decade is wishful thinking"

[griffam]

http://www.marketwatch.com/story/a-5-yearly-gain-from-the-sp-500-over-the-next-decade-is-wishful-thinking-2016-11-27

Some interesting points, here but this mostly reads as a grumble-monger on MarketWatch (although he runs the website and used to work at Morningstar). At least he points out that it's important to keep advisor fees low.

Is anyone else worried about S&P returns over the next few years based on Shiller valuations or elevated P/E ratios?

[ender]

Is anyone else worried about S&P returns over the next few years based on Shiller valuations or elevated P/E ratios?

Worrying over this is pointless.

[NoStacheOhio]

http://www.marketwatch.com/story/a-5-yearly-gain-from-the-sp-500-over-the-next-decade-is-wishful-thinking-2016-11-27

Some interesting points, here but this mostly reads as a grumble-monger on MarketWatch (although he runs the website and used to work at Morningstar). At least he points out that it's important to keep advisor fees low.

Is anyone else worried about S&P returns over the next few years based on Shiller valuations or elevated P/E ratios?

I think this falls in the "what are you going to do about it?" category. Investing in a broad index fund is still the least bad option. What else are you going to do? Chase dividends? Pay active management fees? Speculate on commodities?

[boarder42]

nope no reason to worry about what you cant predict or control.  I thought the market would tank if trump won.  i have a financial advisor buddy who told his clients to go to cash.  not a great move.  i just kept with the plan you cant predict markets

for every article saying doom and gloom there is another talking about how great it will do.

[frugledoc]

Might do better or worse than 5%.

I don't see how they can say it is wishful thinking when the current market can go up or down 5% in a week.

[griffam]

I suppose I was more getting at his underpinning reasoning - I know there is no shortage of doom and gloom articles like this, but I guess I was a bit more curious about whether anyone had looked into recent increases in P/E ratios and so on.

I know that nothing can be predicted with any accuracy, but I wasn't sure if these fundamentals played into any 90/10, 80/20 portfolio debates or if this was just squabble.

I always enjoy everyone's input and really appreciate this forum and your thoughts.

[ender]

Also, I'm so sick of people blindly using the PE without ever acknowledging any difference in accounting principles or anything of that nature (global interest rates, either).

The article does this and it makes me so frustrated.

[marty998]

http://www.marketwatch.com/story/a-5-yearly-gain-from-the-sp-500-over-the-next-decade-is-wishful-thinking-2016-11-27

Some interesting points, here but this mostly reads as a grumble-monger on MarketWatch (although he runs the website and used to work at Morningstar). At least he points out that it's important to keep advisor fees low.

Is anyone else worried about S&P returns over the next few years based on Shiller valuations or elevated P/E ratios?

I think this falls in the "what are you going to do about it?" category. Investing in a broad index fund is still the least bad option. What else are you going to do? Chase dividends? Pay active management fees? Speculate on commodities?

It was a pretty horrendous day for commodities yesterday...

[boarder42]

shiller PE is a good go by for what SWR should be safe for your retirement.  its not a bible. but as far as wealth building who knows what the market will do.

[MrGreen]

I recommend the book "How I Found Freedom In An Unfree World," by Harry Browne, for anyone caught up in market predictions.

[PizzaSteve]

Price is valuable information.  It is a forward looking indicator.  Earnings are useful, but are a backward looking indicator.  By combining the two, one is already entering logically flawed territory in terms of a model for valuation.  One needs to project future earnings if you are to compare prices to reasonable returns.  One must also consider the cost of capital and adjust for risk.  These are very simple concepts, yet people on this blog want something even simpler and to get reassurance that making decisions on that simple rule of thumb is rational.

You won't get it here.  Take the time to read at least one full corporate earnings report, 10Ks,listen to annual shareholders meetings, etc.  If you don't trust market valuations, try to project future earnings and value a company or the market as a whole. It is a useful and valuable exercise to try, but few who are not business school students will do it.  Good luck....

[NoStacheOhio]

Also, I'm so sick of people blindly using the PE without ever acknowledging any difference in accounting principles or anything of that nature (global interest rates, either).

The article does this and it makes me so frustrated.

I was just reading something a few days ago about the number of companies that have been reprimanded by the SEC for their earnings reports, and how many are using non-GAAP numbers. It's unnerving, because I wonder how much of the share prices are smoke and mirrors.

[dude]

I think the prognosticators are largely right, but the reality of it is, nobody really knows.  Best I can do is just stay invested, hope for the best, and be prepared for lower returns.  If they're right, I'll still be fine.  If they're wrong (and returns approach or exceed historical averages), then I'm GOLDEN.

[powskier]

"Everybody knows that the dice are loaded, everybody rolls with their fingers crossed" -Leonard Cohen

This verse sums up my market expectations.

[aspiringnomad]

"Everybody knows that the dice are loaded, everybody rolls with their fingers crossed" -Leonard Cohen

This verse sums up my market expectations.

Love it.

[Indexer]

I would like to point out the article says 5% 'real' returns. That is after inflation. Given recent inflation of 2% and historic inflation of 3% that means the article is really saying achieving 7-8% returns could be unrealistic.

I might not go as bearish as the article, but I agree with the basic idea.

Given that bond yields are near historic lows and stocks are expensive as measured by just about any metric you want to use I think it is safe to say that lower returns are more likely than higher returns. Anything can happen, but I wouldn't count on stocks churning out their historic 10% returns over the next 10 years.

[arebelspy]

I'd be fine with 3% real over the next decade.

I mean, not thrilled.  But fine.

(Actually, still being in semi-accumulation this early in our ER, I'd be fine with negative returns for 5-10 years, providing a reversion to the mean afterward. That aside, even if I wasn't making money right now, I'd still be good with a 3% real return for a decade.)

[arebelspy]

Great post, Pizza Steve.

[Indexer]

I would like to point out the article says 5% 'real' returns. That is after inflation. Given recent inflation of 2% and historic inflation of 3% that means the article is really saying achieving 7-8% returns could be unrealistic.

I might not go as bearish as the article, but I agree with the basic idea.

Given that bond yields are near historic lows and stocks are expensive as measured by just about any metric you want to use I think it is safe to say that lower returns are more likely than higher returns. Anything can happen, but I wouldn't count on stocks churning out their historic 10% returns over the next 10 years.

Please support this notion of 'expensive.'  Are you suggesting the efficient market hypothesis is wrong and that stocks are incorrectly over valued or is this some comment on a low interest rate environment?  It is important to know that real returns are what matter, not old ideas of valuation based on nominal returns.

It is a pet peeve of mine that these types of ideas get thrown around.  For example, radio ads have been telling people to lock in rates because interest rates have no where to go but up, for a decade, yet they continued to drop (and i made a killing using ARMs and buying long muni bonds.  No one on this forum i believe has the data to support stocks being expensive or cheap.  They are what they are. 

Why does this matter?   Calling them expensive may scare novice investors from buying.  I have a collegue who really needs the money, but completely missed the rally since 2008 thinking this way.  He is still sitting on like 50K cash since 2009.

You are acting like I said something crazy. I said it might be prudent to expect lower than historic returns in the future. Vanguard said the same thing in their 2016 economic outlook. Bogle has said the same thing. Robert Shiller has said the same thing. Plenty of other people who support EHS have said the same thing. I didn't say markets were inefficient or that people should avoid stocks.

Stock valuations are higher than historic figures. The market can be efficient AND more expensive than historical valuations. If the expected returns from bonds & cash are lower than usual due to low rates that can push more money into stocks. More money in stocks pushes down dividend yields. Dividend yield represents part of the stock return. Lower yields and higher valuations do imply returns in the future might be lower than they were in the past.

US Stocks have higher than historic valuations measured by the following metrics: P/E, Shiller CAPE, Fair-Value CAPE, P/B, P/S, market cap/GDP, and dividend yields.

It is important to know that real returns are what matter, not old ideas of valuation based on nominal returns.

Real returns are what matters. That's why I pointed out the article was talking about real returns and not nominal returns. I'm not sure what the second part of this sentence means. What do you consider "old ideas of valuation based on nominal returns?"

[SwordGuy]

Like most of the rest of you, I have no real idea what the market will do over the next week, much less over the next decade or three.   

I'm diversifying so that I'll have multiple income streams coming from radically different sources.

Stocks, of course.  Some international, some domestic.

Rental income in my local town.   Risks are a major war where most of the troops are overseas and their families leave town, too.   Local economy would be in a recession.
But if it's a major war, the national economy would probably be booming, so stocks might do very well.   (Except for those who get the majority of their materials from an area adversely affected by the war.)

I have some farm land and everyone has to eat.   Risk there is bad weather or floods.

And some cash, though not huge amounts.   

My wife's SS will kick in come March.

And we're flipping a house.

So, lots of different income streams, not counting my day job that's probably good for more years than I would want to work it, regardless of the economy.

Either way we'll be fine.   At this point in our calculations, stock market returns are "fun money" or "investment money", not "day-to-day living expenses". 

I guess we'll find out a decade from now!

[EnjoyIt]

I love seeing doom and gloom articles. This one is not that gloomy unfortunately. I prefer that most people fear the market.

[COEE]

Might do better or worse than 5%.

I would reckon you're right.

[bigcmagor]

An IU guy living in Kentucky has greater concerns that the return of the S&P 500 - in my humble opinion.

[frugledoc]

Might do better or worse than 5%.

I would reckon you're right.

Unless it's exactly 5%, I didn't cover that in my guess.

[Mola]

Like most of the rest of you, I have no real idea what the market will do over the next week, much less over the next decade or three.   

I'm diversifying so that I'll have multiple income streams coming from radically different sources.

Stocks, of course.  Some international, some domestic.

Rental income in my local town.   Risks are a major war where most of the troops are overseas and their families leave town, too.   Local economy would be in a recession.
But if it's a major war, the national economy would probably be booming, so stocks might do very well.   (Except for those who get the majority of their materials from an area adversely affected by the war.)

I have some farm land and everyone has to eat.   Risk there is bad weather or floods.

And some cash, though not huge amounts.   

My wife's SS will kick in come March.

And we're flipping a house.

So, lots of different income streams, not counting my day job that's probably good for more years than I would want to work it, regardless of the economy.

Either way we'll be fine.   At this point in our calculations, stock market returns are "fun money" or "investment money", not "day-to-day living expenses". 

I guess we'll find out a decade from now!

This. I think planning for a lower return from the global economy than in the past is prudent. Stocks aren't the only investment you can make in you're security.

[Midabistew]

I like the chart on page 11 of this research paper.  With the CAPE around 25 today, 5% looks like a good number to plan around for the next 10 years, granted the distribution around the regression line is very large. The color chart on page 10 is another one graphically depicting the theory pointed out by the OP.

http://www.starcapital.de/files/publikationen/Research_2016-01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling.pdf

[Much Fishing to Do]

Nothing between 0 and 15 would surprise me and can't understand how it wouldn't surprise anyone.  It always cracks me up how many analysts always predict the next years s&p 500 close to be +3-8 % over the current level....its all basically the same prediction..... when a negative 8% or positive 17% for the year seems just as likely.

[One Noisy Cat]

Pulling a number out of a hat is probably more accurate for predicting the next decade.

[Paul der Krake]

Mr Market is a drunk.

He's more fun to be around when you don't attach too much meaning to what he says, or try to predict where he's going next.

[Metric Mouse]

Mr Market is a drunk.

He's more fun to be around when you don't attach too much meaning to what he says, or try to predict where he's going next.

It's sometimes a little unnerving though when one depends upon him to show up for work over the next few years. I mean, he's almost always been there before, but it's always exciting to find out if he'll be there tomorrow...

[MustacheAndaHalf]

"Research Affiliates’ future 10-year annualized real return expectations for the S&P 500 and the Barclays U.S. Aggregate are 1.1% and 0.50%, respectively."

And that's the problem - Research Affiliates are touted as experts when nobody is an expert on predicting future stock performance.  Even the P/E related studies conducted by Vanguard found a 0.40 correlation between P/E and performance over the following decades.  In other words, most of the time, it doesn't work.  It's correlation, not prediction.

(From Indexer)
"If the expected returns from bonds & cash are lower than usual due to low rates that can push more money into stocks."

The problem is that it's very easy to go from "may be lower" to "will be lower", at which point it's too specific a prediction.  And it doesn't matter how many Nobel winners make that specific a prediction, or how many founders of the index fund industry - they can't predict the future specifically.

[Much Fishing to Do]

"Research Affiliates’ future 10-year annualized real return expectations for the S&P 500 and the Barclays U.S. Aggregate are 1.1% and 0.50%, respectively."

So does that include the 8% rise the last month or not? If so the 0.5% aggregate growth over 10 years means we're at negative going forward  ;-)  .... in other words....anyone who is using a decimal place in a prediction like this is being beyond funny.....

[Kaspian]

Here's a Marketwatch call for the year 2016:

Paul B. Farrell via MarketWatch: "No, this is not a prediction of a minor correction. Plan on a 50% crash."
http://www.marketwatch.com/story/stock-market-crash-of-2016-the-countdown-begins-2015-02-25

Oooo... 50% drop this year, huh?  Sell everything! ...Back in January--12 months ago! 

Where there is no accountability, there is no credibility.  They'd be much better off hiring a bunch of gypsy fortune tellers to write their columns.  I might actually read a story written by someone called Zoltan the Magnificent or Madam Morrow.

[691175002]

Its hard to discuss this topic because so many investors no economic background and don't understand the conventions and terminology.

I personally believe that increased accessibility of investing has permanently increased long-run valuations of equity.

Fifty years ago you would be lucky to pay 2% for a portfolio of maybe ten stocks.  Today you can buy hundreds or thousands of stocks for a few basis points.  Either way, 10% - 2% in fees is the same as 8% - 0% in fees.

Stocks provide more utility to current investors, therefore it is natural that they will settle at a more expensive equilibrium.  I would go even further and state that the rise of DIY passive investing has made equity have the appearance of being lower risk than it has in the past (therefore justifying higher valuations).  Note that diversification does lower risk, so an investor should be willing to pay more for a diversified portfolio than they would for a single stock (systematic vs unsystematic risk, CAPM, etc...)

[sol]

Man, I really hope this thread is still around in ten years.

For the record, on November 28, 2016 they predicted the S&P500 would have an annualized total return of 1.1% for the next ten years, starting from that day's price of 220.48.  Don't forget the dividends!

So far, it has risen 1.87% in nine days, but who knows what the next week/year/decade will bring?

[Metric Mouse]

Its hard to discuss this topic because so many investors no economic background and don't understand the conventions and terminology.
....

Either way, 10% - 2% in fees is the same as 8% - 0% in fees.

I'm fairly certain the bolded is incorrect... One can run the numbers here to see the startling difference in outcomes with higher rates of return: http://buyupside.com/calculators/feesdec07.htm

...So far, it has risen 1.87% in nine days...

At this rate, we'll all be retired in a year!