Analysts at Goldman Sachs recently released their prediction for stock market returns for the next decade. Based on their analysis, they predict stocks will only return 3% annually over the next ten years. Given the last ten years, in which stocks have averaged 13% annual returns, this would be a dramatic decrease. They base their argument on five factors:
- Current valuations are much higher than average.
- Stock market concentration is close to an all-time high for the last 100 years and with the S&P 500 being a market-weighted index, those companies will have an outsized impact on the index.
- Related to #2, extremely large companies have difficulty maintaining strong growth due to their size, therefore, their growth will start to slow.
- They expect the economy, as measured by GDP, to contract four times over the next decade which is twice as many times as the previous decade, and stocks take a hit during economic contractions.
- The ten-year U.S. Treasury bond is yielding over 4%, higher than the last decade and it will compete for investment dollars.
I have not had a chance to fully read the report yet, but I have seen it plastered all over the news, and maybe you have too. But there is only so much stock (pun intended) that you can put into the prediction. Keep in mind that two years ago, Goldman Sachs was warning that a recession was imminent and to position your investments for the inevitability. But no recession came and in fact, the stock market went on an incredible run. Wave Goodbye To the Stock Market's Historic Run, Goldman Sachs Says Goldman Sachs warns of more trouble for US stocks | CNN Business
I am not poking fun at Goldman Sachs, I think they are a great firm filled with smart people. I can provide numerous examples of similar predictions that turned out to be horribly wrong that came from top firms such as JP Morgan, BlackRock, Pimco, etc. (and let’s throw the Federal Reserve under the bus while we can for their “transitory inflation” prediction). It’s just that the global economy is incredibly complex and extremely difficult to predict. You are, after all, trying to predict the impossible, the future. Even the advent of artificial intelligence could dramatically increase productivity and upend previous assumptions. So, take these and many other reports with some skepticism, as we have yet to see what the future holds.
But, With That Said… Goldman Sachs has a point, it would be foolish to think stocks are going to continue on a torrid pace of 13% annual returns. As the saying goes, trees don’t grow to the sky. There is some precedence from previous data that stocks go through years of great performance and not-so-great performance and performance tends to lag following outperformance over long periods.
Wall Street is worried stocks might be on the cusp of a ‘lost decade’ - MarketWatch
Financial Planning/Investment Strategy Corner:
What Potential Lower Stock Returns Mean For Investors? Well, it depends on what you have been doing already. The period from January 2000 to December 2009 started with the dot-com bubble, followed by 9/11 and the two wars in Iraq and Afghanistan, and a real estate bubble for good measure. During that well-known “Lost Decade for Stocks”, the S&P 500 returned -0.95% annually. But what gets lost is that sectors outside of large growth and overvalued technology stocks performed much better. Large-value companies returned 4.1% annually, small-company stocks returned almost 8.0%, and small-value companies returned 13.7%! Also, internationally developed markets and emerging markets performed better than the S&P 500, as did bonds. Having the correct asset allocation for your goals and risk tolerance along with diversification across stocks, and bonds, paired with rebalancing are the keys to helping smooth out returns. As money managers, we look to diversify portfolios to reduce concentration risk, thereby reducing the chances of one sector of the market pulling down portfolio performance. Sometimes this hurts when one sector is on a huge upswing (such as big tech), but it certainly helps if that sector should have a hard fall. A Tale of Two Decades: Lessons for Long-Term Investors | Dimensional
Quick Hits:
- The science of why your body takes longer to bounce back after hitting 40: WSJ
- Unlike the U.S., Japan doesn’t have a housing shortage. In fact, it has ten million empty houses which can be bought for as little as $25,000. NYT
- Why does Japan have so many empty houses? One big reason is a shrinking population, which is a global phenomenon: WSJ
- Interested in buying an EV car? Now, may be the time to find a bargain: WSJ
- They found another tomb in front of the famous Indiana Jones building at Petra! CNN
- Here are a couple of dozen recipes that utilize and celebrate fall vegetables: Simply Recipes
Will AI Save the World? One of the pioneers of the internet and technology, Marc Andreessen, is unabashedly optimistic about the potential for AI. Rather than being a threat, he feels AI will offer an unprecedented opportunity to solve some of the most pressing global challenges, such as healthcare, education, and productivity which will create new industries and improve standards of living. As opposed to replacing jobs, he sees AI as improving human potential, driving innovation, and addressing inequality. He does stress that responsible development and deployment of AI is necessary, but it is a transformative technology that will help humanity overcome complex problems. Why AI Will Save the World | Andreessen Horowitz
Quote: “Artificial Intelligence will reach human levels by around 2029. Follow that out further to, say, 2045, we will have multiplied the intelligence, the human biological machine intelligence of our civilization a billion-fold.” Ray Kurzweil, famous futurist
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