Future Stock Market Return Forecasts

Since we are now entering a new decade, I wanted to share some recent readings and charts related to "Future Stock Market Return Forecasts". 

First, here's a big picture view of long-term historic average annualized returns in the U.S. Stock Market (S&P 500) from Ben Carlson's "A Wealth of Common Sense" blog:

Above we see that long periods of double-digit annualized returns are followed by shorter periods (from 8 to 13 years) of low single digit or even slightly negative returns. As we know, the last decade was a very profitable one with an average annualized roi above 14%. So what will the upcoming decade of the 2020s bring? -- a continuation of bullish double-digit returns or a reversion to a period of low, stagnant returns?

To address this question, I'll share forecasts I've encountered in my readings during the past several days from three well-respected sources. But first, let me share a caveat. Forecasts about anything in the future are dubious at best and stock market forecasts are certainly no exception. Nevertheless, I've found these resources below to be better than most; so, for whatever it's worth, I'm sharing them with you along with my own thoughts.

I look forward to reading the quarterly Guide to the Markets from JPMorgan. The most recent version was recently issued for the 1st Quarter of 2021 and included this chart showing S&P 500 Forward P/E and subsequent 1-Year and also 5-Year Return estimates. As of December 31st, 2020, their forward 1-Year expected return is about +1% and their 5-Year return around -1%.

In addition to these JPMorgan one-year and five-year forecasts, below are two 10-year forecasts.  The first is from Meb Faber Research which states:  You know two of the starting variables (dividend yield and starting 10-year PE CAPE valuation), you don’t know the other three (future inflation, future real earnings growth, and ending valuation.).  But historically, you can come up with a matrix to give you a good idea of where we might be going. And in most cases, it isn’t pretty. I think the base case for US stocks is about 0% to 2% real returns for a decade.

The second 10-year forecast (shown below) is from the Research Affiliates interactive Asset Allocation Model. Their model is even slightly more sobering since they expect real returns for U.S. Large Cap stocks to approximate -0.2% per year on average over the next 10 years. They expect U.S. Small Caps to perform somewhat better at +2.8% annualized, but International stocks to outperform both U.S. categories -- EAFE (Europe, Australasia and the Far East) stocks at +4.1% and the best performing category is Emerging Markets at +5.7%.

You might agree or disagree with the conclusions implied by these charts -- I'm sure there are other analysts and resources that are providing arguments for a continuation of the past decade's bull market during the next decade. What is your opinion? I like this quote from Steve Jobs concerning opinions: "Don’t let the noise of others’ opinions drown out your own inner voice." My own inner voice is saying that the charts above are likely to be reasonably close to the truth. But I'm open to considering other informed viewpoints. What is your inner voice telling you?

So, what do we investors do during an expected period of a relatively stagnant stock market? I have some good news for you. A stagnant market is an ideal time for us Covered Calls investors to outperform the stock market by a significant percentage. Whereas in a bull market, we can expect an informed and disciplined Covered Calls investing strategy to outperform the S&P 500 benchmark by about 3 to 5% on an annualized return-on-investment basis, an even greater annualized roi outperformance relative to the S&P 500 is likely in stagnant markets. As the Covered Calls Advisor, my current plan is (as was the case during 2020) to continue investing primarily via in-the-money Covered Calls. But remember, Job #1 for us Covered Calls investors is good stock selection. So, I will continue to use my Company Checklist to identify investment-worthy QVG (quality, value, and growth) companies -- companies in quality businesses, with quality management, good valuations, and good growth prospects. For those companies that pay dividends, I will use my Dividend Capture Strategy worksheet to see if the company meets my criteria; and if it does, then also use it to guide the timing of my entry into the Covered Calls position. I will also check for the upcoming earnings reporting date for each company under consideration, and because of the elevated uncertainty associated with the normally significant stock price reactions to earnings news, I will consistently avoid being invested on the day of any company's earnings report.  

I would appreciate receiving any comments (pro or con) or questions you might have on this article.

Best Wishes and Godspeed,
Jeff
partlow@cox.net