What CFOs expect for stock market returns

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Rick Ferri
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What CFOs expect for stock market returns

Post by Rick Ferri »

Company boards make capital decisions based in part on their CFOs’ assessments of the cost of equity, and these decisions have an impact on future returns in the equity market. Company boards may issue new stock to take on new projects when they believe the cost of equity capital is low (stock price is high), and may buy back stock to reduce share count when the cost of equity is high (stock price is low). These decisions affect long-term valuations.

Duke University and CFO Magazine conduct the Global Business Outlook Survey each quarter to find out what CFOs think about a lot of economic factors, including their forecasts for interest rates, growth, inflation, the price of oil and stock market returns. Duke University professors John Graham and Campbell Harvey analyzed the data from the March 2015 survey to determine a 10-year equity risk premium forecast, which is the excess return the stock market is expected to earn over a risk-free rate. They published their findings in a paper entitled The Equity Risk Premium in 2015.

I'm not implying that investors should slavishly react to the quarterly forecasts of CFOs any more than they should react to any other moving forecasts. But passively minded investors can use these numbers to estimate what their portfolio’s return might be given different asset allocations.

This article has the expected return data from Graham and Harvey (with permission) and my commentary: What CFOs Think About the Market

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Re: What CFOs expect for stock market returns

Post by Toons »

"The mean CFO forecast using the March data was 6.63% over the next ten years"
More than satisfactory :happy
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Re: What CFOs expect for stock market returns

Post by alex_686 »

Toons wrote:"The mean CFO forecast using the March data was 6.63% over the next ten years"
More than satisfactory :happy
I am not so sure. CEOs have been shown to have a upwards, positive basis on returns and the future. I suppose it is part of the job. But this casts a shadow of doubt on how usefully this number will be to us. Now I suppose I need to read both articles instead of just blindly posting. :happy
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Re: What CFOs expect for stock market returns

Post by Browser »

Are CFOs any better at forecasting than economists? Oh gee -- I'll bet a lot of them are economists.
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Re: What CFOs expect for stock market returns

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alex_686 wrote:
Toons wrote:"The mean CFO forecast using the March data was 6.63% over the next ten years"
More than satisfactory :happy
I am not so sure. CEOs have been shown to have a upwards, positive basis on returns and the future. I suppose it is part of the job. But this casts a shadow of doubt on how usefully this number will be to us. Now I suppose I need to read both articles instead of just blindly posting. :happy

Its just a forecast,,,,,crystal ball gazing :happy
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Re: What CFOs expect for stock market returns

Post by Rick Ferri »

FYI, Campbell Harvey just sent me an update through June. The 10-year S&P 500 CFO ERP is now 6.45%, down slightly from 6.63% in March.

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Re: What CFOs expect for stock market returns

Post by JoMoney »

Given the current inflation rates, something around 6.6% seems like as fair of an 'average' estimate as any
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Re: What CFOs expect for stock market returns

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JoMoney wrote:Given the current inflation rates, something around 6.6% seems like as fair of an 'average' estimate as any
Equity Risk Premium is the expected yield above the 10 year treasury. The 10 year treasury already covers expected inflation. So expected inflation doesn't have much to do with this.
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Re: What CFOs expect for stock market returns

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Is there any reason to pay any attention whatsoever to CFO forecasts of the 10-year ERP? I see from the linked article that back in 2000 they predicted an annualized 10-year ERP of over 10%. As it turns out, the annualized return of the US stock market over that period was -0.27%, while the annualized return of the 10-year T-note was 6.26%. So, the realized ERP was -6.53%. Gee, they were only off by 16 1/2% or so. :oops:
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Re: What CFOs expect for stock market returns

Post by Tamahome »

Thank you for the article! As expected returns are going lower and lower, how much should we be saving. It used to be that you were supposed to save 10%. More recently I heard 15%. Are we up to 17, 18, or 20%?

Rick, I would be interested to know whether you think we should be saving more. If so, what percentage would you think of as a general guide?
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Re: What CFOs expect for stock market returns

Post by cfs »

Thank you.

Thanks Rick Ferri for the note, for the article, and for the links. I guess that investing and saving "more" is the key for the next decade, for the next two decades, for the next three decades . . .

Thanks again.
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Re: What CFOs expect for stock market returns

Post by abuss368 »

Thank you Rick!
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Re: What CFOs expect for stock market returns

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I apologize if I missed it but I couldn't find in the article whether or not that number includes re-invested dividends which I assume it doesn't, given the purpose of the forecast. As for the previous forecasts, while the 2000-2010 period was clearly off, the beginning and end points were both extremes. Looking at the 2002-2005 forecasts they are pretty close to the return of VTSAX over those same periods.

I think this kind of forecast does actually carry a bit more weight than a normal forecast given that these are forecasts being made by people who will actually influence the returns of stocks. Perception here may quite literally be reality in many ways.
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Re: What CFOs expect for stock market returns

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Alchemist wrote:I apologize if I missed it but I couldn't find in the article whether or not that number includes re-invested dividends which I assume it doesn't, given the purpose of the forecast. As for the previous forecasts, while the 2000-2010 period was clearly off, the beginning and end points were both extremes. Looking at the 2002-2005 forecasts they are pretty close to the return of VTSAX over those same periods.

I think this kind of forecast does actually carry a bit more weight than a normal forecast given that these are forecasts being made by people who will actually influence the returns of stocks. Perception here may quite literally be reality in many ways.
The question asked of CFOs was their forecast for the S&P 500's "total return" over the next ten years. This would include dividends and dividend reinvestment.

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Re: What CFOs expect for stock market returns

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Dulocracy wrote:Thank you for the article! As expected returns are going lower and lower, how much should we be saving. It used to be that you were supposed to save 10%. More recently I heard 15%. Are we up to 17, 18, or 20%?

Rick, I would be interested to know whether you think we should be saving more. If so, what percentage would you think of as a general guide?
Not Rick, but according to the Bogleheads Forum, anything less than 20% since Forum inception has been below par. :) The rest of society has been using outdated savings percentages for quite some time.
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Re: What CFOs expect for stock market returns

Post by Tamahome »

Grt2bOutdoors wrote:
Dulocracy wrote:Thank you for the article! As expected returns are going lower and lower, how much should we be saving. It used to be that you were supposed to save 10%. More recently I heard 15%. Are we up to 17, 18, or 20%?

Rick, I would be interested to know whether you think we should be saving more. If so, what percentage would you think of as a general guide?
Not Rick, but according to the Bogleheads Forum, anything less than 20% since Forum inception has been below par. :) The rest of society has been using outdated savings percentages for quite some time.
So I got started late, which caused some concern. Now I am learning that my 16.5% is not over-contributing, but under-contributing. Sign me up from the hand-wringing in your other post asking retirees if they were as concerned when they were accumulating.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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Re: What CFOs expect for stock market returns

Post by Alchemist »

Rick Ferri wrote:
Alchemist wrote:I apologize if I missed it but I couldn't find in the article whether or not that number includes re-invested dividends which I assume it doesn't, given the purpose of the forecast. As for the previous forecasts, while the 2000-2010 period was clearly off, the beginning and end points were both extremes. Looking at the 2002-2005 forecasts they are pretty close to the return of VTSAX over those same periods.

I think this kind of forecast does actually carry a bit more weight than a normal forecast given that these are forecasts being made by people who will actually influence the returns of stocks. Perception here may quite literally be reality in many ways.
The question asked of CFOs was their forecast for the S&P 500's "total return" over the next ten years. This would include dividends and dividend reinvestment.

Rick Ferri
Thank you very much for the clarification!

I thought I was being conservative with my own 7-8% assumption. Guess the future will tell.
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Re: What CFOs expect for stock market returns

Post by Rick Ferri »

Alchemist wrote:I thought I was being conservative with my own 7-8% assumption. Guess the future will tell.
IMO, your estimate is on the aggressive side. Assuming 2% inflation, I'm using 6.5% total return over the next 10 years and 7.0% over the next 30 years.

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Re: What CFOs expect for stock market returns

Post by TradingPlaces »

There are two questions to ask:

- is this data shown to be predictive of future returns?
- can this data yield to market impact because of future actions of CFOs?

There is not enough data in this series to have done any studies of prediction. So that's ding number one.
This data could cause market impact, but the actual timing of stock issues is uncertain, and that is the component that can cause market impact.

We can probably dismiss this data as garbage, until and unless they do this for 30 or more years, and then cross-validate it, using 10-years ago forecast vs forward 10-year returns. And they better keep the methodology stable during all that time, data collection clean, and not kill the data series.
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