Vanguard issues 10-year forecast for stock, bond market returns

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
alex123711
Posts: 93
Joined: Sun May 20, 2018 5:01 am

Vanguard issues 10-year forecast for stock, bond market returns

Post by alex123711 » Thu May 23, 2019 5:29 pm

U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35 percent chance of a recession in the next 12 months.
https://www.philly.com/business/vanguar ... 90522.html

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?

dbr
Posts: 29480
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by dbr » Thu May 23, 2019 5:34 pm

They mean world ex US.

As far as what to do -- nothing?

iamlucky13
Posts: 1342
Joined: Sat Mar 04, 2017 5:28 pm
Location: Western Washington

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by iamlucky13 » Thu May 23, 2019 5:38 pm

alex123711 wrote:
Thu May 23, 2019 5:29 pm
What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
The same thing you did in January when Vanguard released a similar report with similar numbers. Continue per your plan, because the decade is difficult to predict, and your plan should be valid for longer than decade time frames, whether it has a fixed allocation over that time, or a glide slope.

When they refer to international returns, they usually mean excluding the US.

MittensMoney
Posts: 172
Joined: Mon Dec 07, 2015 10:59 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by MittensMoney » Thu May 23, 2019 5:40 pm

*taps the crystal ball* - "is this thing on??"

dbr
Posts: 29480
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by dbr » Thu May 23, 2019 5:42 pm

dbr wrote:
Thu May 23, 2019 5:34 pm
They mean world ex US.

As far as what to do -- nothing?
Sorry. I typed that wrong nothing!

RadAudit
Posts: 3421
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by RadAudit » Thu May 23, 2019 5:45 pm

Well, you could use it to develop a SWAG to see if your portfolio and planned rate of investing funds will provide sufficient returns to meet your long term goals. (HINT: invest more). Wouldn't put an undue reliance on the answers from that calculation. Then forget it.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

User avatar
nisiprius
Advisory Board
Posts: 38470
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by nisiprius » Thu May 23, 2019 5:49 pm

alex123711 wrote:
Thu May 23, 2019 5:29 pm
...What to do in this situation?...
Bookmark it... print it to your disk drive or save a web archive in case it doesn't stay up on their website for ten years... and mark your calendar for May 23rd, 2029 to check how the actual returns compared with the forecasts, and post the results.

I can't think of anything else to do with it.

OK, shame on me, I haven't read the article. I betcha the article doesn't say how they determined the range of the results. I'm going to look now. [Later] Yep, I "won" my "bet."
Last edited by nisiprius on Thu May 23, 2019 6:08 pm, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

bondsr4me
Posts: 1140
Joined: Fri Oct 18, 2013 7:08 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by bondsr4me » Thu May 23, 2019 5:54 pm

I pay no attention to predictions like this even if Vanguard did the prediction.

Nobody knows what will happen 10 days from now let alone 10 years.

Isn’t this remotely market-timing....trying to predict outcomes.

Anyway, probably best not to act on this.

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Thu May 23, 2019 5:57 pm

:shock:
alex123711 wrote:
Thu May 23, 2019 5:29 pm
U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35 percent chance of a recession in the next 12 months.
https://www.philly.com/business/vanguar ... 90522.html

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
US equity return forecasts seem way too low. The buyback + dividend yield is over 5%. What sort of stagnation and/or deflation are they forecasting?

Yet the expect 2% real GDP growth. AND assume 2% inflation which implicitly means 4% nominal GDP growth.

What high valuations do they mean? Forward PE is below the average going back to mid 1990s, yet rates are way lower than average.

Basically they're calling for 4% annual nominal GDP growth and with 5% shareholder current yield the only way to get only 5% nominal returns is to have valuatons contract 4% per year or about 35%. So that would mean the S&P is trading at 11 x forward earnings in 10 years and would have 7.5% shareholder yield if capital return payout ratios stay the same and earnings growth with their GDP forecast.

All their forecasts make sense except the return one..not consistent with everything else they project. I hope they're not also a victim of CAPE.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Thu May 23, 2019 6:10 pm

SovereignInvestor wrote:
Thu May 23, 2019 5:57 pm
Basically they're calling for 4% annual nominal GDP growth and with 5% shareholder current yield the only way to get only 5% nominal returns is to have valuatons contract 4% per year or about 35%. So that would mean the S&P is trading at 11 x forward earnings in 10 years and would have 7.5% shareholder yield if capital return payout ratios stay the same and earnings growth with their GDP forecast.
???

kosomoto
Posts: 466
Joined: Tue Nov 24, 2015 8:51 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by kosomoto » Thu May 23, 2019 6:28 pm

SovereignInvestor wrote:
Thu May 23, 2019 5:57 pm
:shock:
alex123711 wrote:
Thu May 23, 2019 5:29 pm
U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35 percent chance of a recession in the next 12 months.
https://www.philly.com/business/vanguar ... 90522.html

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
US equity return forecasts seem way too low. The buyback + dividend yield is over 5%. What sort of stagnation and/or deflation are they forecasting?

Yet the expect 2% real GDP growth. AND assume 2% inflation which implicitly means 4% nominal GDP growth.

What high valuations do they mean? Forward PE is below the average going back to mid 1990s, yet rates are way lower than average.

Basically they're calling for 4% annual nominal GDP growth and with 5% shareholder current yield the only way to get only 5% nominal returns is to have valuatons contract 4% per year or about 35%. So that would mean the S&P is trading at 11 x forward earnings in 10 years and would have 7.5% shareholder yield if capital return payout ratios stay the same and earnings growth with their GDP forecast.

All their forecasts make sense except the return one..not consistent with everything else they project. I hope they're not also a victim of CAPE.
They are clearly a victim of CAPE. RIP. Valuations would need to fall dramatically in ten years to get these returns. I don’t know why they base their return predictions based on valuation changes. It’s silly to predict that. For all we know they could be higher.

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Thu May 23, 2019 6:46 pm

kosomoto wrote:
Thu May 23, 2019 6:28 pm
SovereignInvestor wrote:
Thu May 23, 2019 5:57 pm
:shock:
alex123711 wrote:
Thu May 23, 2019 5:29 pm
U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35 percent chance of a recession in the next 12 months.
https://www.philly.com/business/vanguar ... 90522.html

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
US equity return forecasts seem way too low. The buyback + dividend yield is over 5%. What sort of stagnation and/or deflation are they forecasting?

Yet the expect 2% real GDP growth. AND assume 2% inflation which implicitly means 4% nominal GDP growth.

What high valuations do they mean? Forward PE is below the average going back to mid 1990s, yet rates are way lower than average.

Basically they're calling for 4% annual nominal GDP growth and with 5% shareholder current yield the only way to get only 5% nominal returns is to have valuatons contract 4% per year or about 35%. So that would mean the S&P is trading at 11 x forward earnings in 10 years and would have 7.5% shareholder yield if capital return payout ratios stay the same and earnings growth with their GDP forecast.

All their forecasts make sense except the return one..not consistent with everything else they project. I hope they're not also a victim of CAPE.
They are clearly a victim of CAPE. RIP. Valuations would need to fall dramatically in ten years to get these returns. I don’t know why they base their return predictions based on valuation changes. It’s silly to predict that. For all we know they could be higher.
Yes indeed.

What's frustrating is their final implied valuation under those assumptions is so low unless the 10Y note is like 10% or something.

Valuation can well be higher.

For most of late 1970s through 1995 the Foreward PE was 20 minus 10Y yield. Then S&p went into bubble in late 1990s and went well above the indication and then hit it around 2004-07 then went far below from 2008-13.

Now the indicated level is near 18 and current forward PE is 16.

Anyway you're right...they shouldn't forecast valuation changes because it can go the other way. And current 16 PE with 10Y at 2.3% is not even close to 2000 when it was 25 Pe with 10Y yield at 6%.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Thu May 23, 2019 7:00 pm

kosomoto wrote:
Thu May 23, 2019 6:28 pm
They are clearly a victim of CAPE. RIP. Valuations would need to fall dramatically in ten years to get these returns.
Let's see:

- Current P/E: 21
- P/E in 2029: 15 (it was below 15 in 2012, for instance)
That's equivalent to a -3.3% annualized.

Dividends: 2%
Which brings us to a -1.3%

Earnings growth: 5% (i.e. twice the real GDP growth post recession. Not too shabby).

Total annualized return: 3.7%, which is even worse than the 4% quoted by the OP, which in fact is the lower bound of typical scenarios and not a worst case estimate.

elainet7
Posts: 199
Joined: Sat Dec 08, 2018 1:52 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by elainet7 » Thu May 23, 2019 7:10 pm

in their TD funds, all have int'l bonds
Do they know something?

User avatar
FIREchief
Posts: 3180
Joined: Fri Aug 19, 2016 6:40 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by FIREchief » Thu May 23, 2019 8:30 pm

elainet7 wrote:
Thu May 23, 2019 7:10 pm
in their TD funds, all have int'l bonds
Do they know something?
I believe that they know exactly the same as the rest of us. NOTHIN!!! :oops:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
vineviz
Posts: 4404
Joined: Tue May 15, 2018 1:55 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by vineviz » Thu May 23, 2019 8:36 pm

FIREchief wrote:
Thu May 23, 2019 8:30 pm
elainet7 wrote:
Thu May 23, 2019 7:10 pm
in their TD funds, all have int'l bonds
Do they know something?
I believe that they know exactly the same as the rest of us.
I’m quite sure they know far more than some us.

Like, 100% sure.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

RJC
Posts: 229
Joined: Fri Dec 14, 2018 1:40 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by RJC » Thu May 23, 2019 9:02 pm

Anyone have their forecast from 5-10 years ago? How did they do?

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Thu May 23, 2019 9:47 pm

Thesaints wrote:
Thu May 23, 2019 7:00 pm
kosomoto wrote:
Thu May 23, 2019 6:28 pm
They are clearly a victim of CAPE. RIP. Valuations would need to fall dramatically in ten years to get these returns.
Let's see:

- Current P/E: 21
- P/E in 2029: 15 (it was below 15 in 2012, for instance)
That's equivalent to a -3.3% annualized.

Dividends: 2%
Which brings us to a -1.3%

Earnings growth: 5% (i.e. twice the real GDP growth post recession. Not too shabby).

Total annualized return: 3.7%, which is even worse than the 4% quoted by the OP, which in fact is the lower bound of typical scenarios and not a worst case estimate.
5% EPS growth way too low. Nominal GDP is what matters not real. That's assumed to be 4% in vanguard article. You're forgetting buybacks if you are going to talk EPS growth so 3% annual buyback share reduction means that's 7% EPS growth.

In 2012 valuations were so low bevause fianncial crisis and EU crisis. Risk premiums even on debt were relatively high.

Using 2012 as the benchmark seems urealistic...even housing barely bottomed then.

Where do you get current PE of 21? 2018 EPS was 162ish. If you use TTM that's barely 18 PE.

GAAP shouldn't be used bevause 2018 had many one Time tax hits from loss of tax deferred asset with tax reform so 2018 GAAP is suppressed.

wootwoot
Posts: 341
Joined: Tue Jan 27, 2009 7:37 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by wootwoot » Thu May 23, 2019 9:51 pm

Does this invalidate the last Vanguard 10 year forecast that was posted here?

https://advisors.vanguard.com/iwe/pdf/FA863418.pdf

User avatar
FIREchief
Posts: 3180
Joined: Fri Aug 19, 2016 6:40 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by FIREchief » Thu May 23, 2019 10:56 pm

vineviz wrote:
Thu May 23, 2019 8:36 pm
FIREchief wrote:
Thu May 23, 2019 8:30 pm
elainet7 wrote:
Thu May 23, 2019 7:10 pm
in their TD funds, all have int'l bonds
Do they know something?
I believe that they know exactly the same as the rest of us. NOTHIN!!! :oops:
I’m quite sure they know far more than some us.

Like, 100% sure.
That's freakin' hilarious!! :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Thu May 23, 2019 11:03 pm

wootwoot wrote:
Thu May 23, 2019 9:51 pm
Does this invalidate the last Vanguard 10 year forecast that was posted here?

https://advisors.vanguard.com/iwe/pdf/FA863418.pdf
Isn't that about the same message ?

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Thu May 23, 2019 11:09 pm

SovereignInvestor wrote:
Thu May 23, 2019 9:47 pm
5% EPS growth way too low. Nominal GDP is what matters not real.
So if we had hyperinflation everyone would be a millionaire ? Which is probably true, but it doesn't mean what you think.
That's assumed to be 4% in vanguard article. You're forgetting buybacks if you are going to talk EPS growth so 3% annual buyback share reduction means that's 7% EPS growth.
The magic of buybacks. One can expand profits an extra 3% year over year, if companies simply keep buying back their shares...
In 2012 valuations were so low bevause fianncial crisis and EU crisis. Risk premiums even on debt were relatively high.

Using 2012 as the benchmark seems urealistic...even housing barely bottomed then.
I'm using 2012 to show that in recent times P/E was below 15. If we want to look extensively to the past 15 is about the historical average.
My point is that it is not an outlandish value.
Where do you get current PE of 21? 2018 EPS was 162ish. If you use TTM that's barely 18 PE.
S&P 500 updated P/E ttm is 20.95.
GAAP shouldn't be used bevause 2018 had many one Time tax hits from loss of tax deferred asset with tax reform so 2018 GAAP is suppressed.
Ah ah. I'm old enough to remember the same point made in 1999 :)

Godot
Posts: 169
Joined: Fri Jun 08, 2018 3:44 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Godot » Thu May 23, 2019 11:37 pm

Vanguard in 2008 regrading future returns:

"Over longer investment horizons, we observe a more significant (albeit imperfect) inverse relationship between current stock valuation metrics (i.e., P/E ratios) and future stock returns. Based on early 2009 valuation levels, our analysis would suggest that a reasonable starting point for a central-tendency estimate for the expected return of the U.S. stock market over the next decade would be the market’s long-term average return of 8%–10%."

"What does the crisis of 2008 imply for 2009 and beyond?"
https://personal.vanguard.com/pdf/icrsme.pdf
“There is man in his entirety, blaming his shoe when his foot is guilty.” ― Samuel Beckett, Waiting for Godot

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Thu May 23, 2019 11:43 pm

The market eventually returned 15%, which is within their mid-range of forecast, although on the high side. Well done, VCMM !

bizkitgto
Posts: 48
Joined: Tue Mar 14, 2017 11:54 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by bizkitgto » Thu May 23, 2019 11:49 pm

Vincent Barbera, managing partner at Newbridge Wealth Management in Berwyn, agrees that Vanguard’s return assumptions are accurate, but “I am undecided how we will get there. It might mean a significant drop in valuations akin to 2008 or just ongoing muted growth with large loads of debt. Either way, in 10 years, we may be cheering for the S&P to break 3,000,” he said.
Well that's a bummer...but we are at the end of a bull run, I don't sense a lot of optimism out there. I guess the question is: do we have a big drop a la 'Black Swan', or will things drag on for 10 years, or maybe the bull roars for another 5 years and then Black Swan shows up? Stay the course, rebalance, and let the bull come back to life. I'm considering going 60/40 from my current 80/20 - time to remove some risk?
Keep it simple: 20% BND, 50% VTI and 30% VXUS

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Thu May 23, 2019 11:56 pm

Thesaints wrote:
Thu May 23, 2019 11:09 pm
SovereignInvestor wrote:
Thu May 23, 2019 9:47 pm
5% EPS growth way too low. Nominal GDP is what matters not real.
So if we had hyperinflation everyone would be a millionaire ? Which is probably true, but it doesn't mean what you think.
That's assumed to be 4% in vanguard article. You're forgetting buybacks if you are going to talk EPS growth so 3% annual buyback share reduction means that's 7% EPS growth.
The magic of buybacks. One can expand profits an extra 3% year over year, if companies simply keep buying back their shares...
In 2012 valuations were so low bevause fianncial crisis and EU crisis. Risk premiums even on debt were relatively high.

Using 2012 as the benchmark seems urealistic...even housing barely bottomed then.
I'm using 2012 to show that in recent times P/E was below 15. If we want to look extensively to the past 15 is about the historical average.
My point is that it is not an outlandish value.
Where do you get current PE of 21? 2018 EPS was 162ish. If you use TTM that's barely 18 PE.
S&P 500 updated P/E ttm is 20.95.
GAAP shouldn't be used bevause 2018 had many one Time tax hits from loss of tax deferred asset with tax reform so 2018 GAAP is suppressed.
Ah ah. I'm old enough to remember the same point made in 1999 :)
That remark about inflation is irrelevant. You're using a number that doesn't reflect inflation by only referencing real GDP. Whether there's high or low ibflation is irrelevant I assume 2% real GDP growth so nominal GDP grows 2% above inflation.

There seems to be mischaracterization of buybacks. Buyback is like a dividend. So yes when a the S&P consistently pays out such little profit in dividend that it buys back 3% of the shared annually as it has on average since 2005, then yes the earnings per share will grow 3% faster than total nominal earnings grow.

It is not expanding profits...only on a per share basis. If they paid the 3% in extra dividend then investors can get 3% more shares if they reinvest...instead each share produces 3% more profit. Dividend versus buyback is irrelevant....math is the same.

You're using TTM pE...the same PE that was like 50 in 2009 and sky high in 2017 and was backward looking and said avoid stocks before the biggest rallies we've seen.

The market prices for the future. Forward operating PE is much better...yes it's biased high due to optimism but it always has the bias so relative comparisons across time are useful.

Not everything is 1999 or a bubble...

Talking about 1999, then the forward PE on the S&P was 25 and one can park cash in 10Y T bonds and get 6%.

Now the forward PE is 16 and 10Y bonds onpy offer 2.3%. The suggestion that the current valuations is remotely similar to 1999 is just way off base.

Yes of course valuations can go to 2012 low levels...great point. But average forward PE since 19995 is 17. The lowest period was 2008 to 2012. From 1995 to present it ranged from 10 to 25. In 2012 it was 12...that is on the low side. For every 2012 PE of 12 there can also be a 22 PE which is near the top end and that would mean the market trades 40% above current level.

IMO the only reason why valuations got so low in 2008-12 is from.fianncial criss and mean reversion because they went sky high in 1998-2001 and over corrected on downside.

User avatar
Ged
Posts: 3784
Joined: Mon May 13, 2013 1:48 pm
Location: Roke

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Ged » Fri May 24, 2019 12:03 am

alex123711 wrote:
Thu May 23, 2019 5:29 pm
U.S. equity returns: 4% – 6%
U.S. aggregate bond returns: 2.5% – 4.5%
International equities returns: 7.5% – 9.5%
International bond returns (hedged): 2% – 4%
Vanguard also said it sees no imminent recession threat, and said the U.S. economy is currently in the mid- to late-stages of the business cycle. The firm predicts a 35 percent chance of a recession in the next 12 months.
https://www.philly.com/business/vanguar ... 90522.html

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
There is nothing here that should cause any change in a well considered financial plan. It is not an unusual outlook. As James P. Morgan once said stocks fluctuate. However if you have something risky in your resource allocation right now, say like a large amount of money you will need short term invested in equities this is a wake up call. Assets that you will need in the short term should not be in stocks.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Fri May 24, 2019 12:10 am

SovereignInvestor wrote:
Thu May 23, 2019 11:56 pm
That remark about inflation is irrelevant. You're using a number that doesn't reflect inflation by only referencing real GDP. Whether there's high or low ibflation is irrelevant I assume 2% real GDP growth so nominal GDP grows 2% above inflation.
I did not mention inflation at all.
There seems to be mischaracterization of buybacks. Buyback is like a dividend. So yes when a the S&P consistently pays out such little profit in dividend that it buys back 3% of the shared annually as it has on average since 2005, then yes the earnings per share will grow 3% faster than total nominal earnings grow.

It is not expanding profits...only on a per share basis. If they paid the 3% in extra dividend then investors can get 3% more shares if they reinvest...instead each share produces 3% more profit. Dividend versus buyback is irrelevant....math is the same.
The math is that if they pay 2% in dividends and another 3% in buyback, earnings have to grow more than 5%, otherwise there is no space for expansion.
You're using TTM pE...the same PE that was like 50 in 2009 and sky high in 2017 and was backward looking and said avoid stocks before the biggest rallies we've seen.
Yes, in 2009 the denominator was close to zero.
Maybe you don't understand my point. I'm saying that we can't exclude P/E might be around 15 in 2029; who can tell ? In that case the next decade annualized return might very well be under 4%.
The market prices for the future. Forward operating PE is much better...yes it's biased high due to optimism but it always has the bias so relative comparisons across time are useful.
That's nice. Too bad future earnings are not known.
Not everything is 1999 or a bubble...

Talking about 1999, then the forward PE on the S&P was 25 and one can park cash in 10Y T bonds and get 6%.

Now the forward PE is 16 and 10Y bonds onpy offer 2.3%. The suggestion that the current valuations is remotely similar to 1999 is just way off base.
In fact, I'm not making it.
Yes of course valuations can go to 2012 low levels...great point. But average forward PE since 19995 is 17. The lowest period was 2008 to 2012. From 1995 to present it ranged from 10 to 25. In 2012 it was 12...that is on the low side. For every 2012 PE of 12 there can also be a 22 PE which is near the top end and that would mean the market trades 40% above current level.
Are you saying that we will never see a P/E under 15 ? It sounds like a very bold prediction.
IMO the only reason why valuations got so low in 2008-12 is from.fianncial criss and mean reversion because they went sky high in 1998-2001 and over corrected on downside.
It corrected 10 years later ???
2008 had nothing to do with 1998
Last edited by Thesaints on Fri May 24, 2019 1:14 pm, edited 1 time in total.

Always passive
Posts: 381
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Always passive » Fri May 24, 2019 12:18 am

iamlucky13 wrote:
Thu May 23, 2019 5:38 pm
alex123711 wrote:
Thu May 23, 2019 5:29 pm
What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
The same thing you did in January when Vanguard released a similar report with similar numbers. Continue per your plan, because the decade is difficult to predict, and your plan should be valid for longer than decade time frames, whether it has a fixed allocation over that time, or a glide slope.

When they refer to international returns, they usually mean excluding the US.

Always passive
Posts: 381
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Always passive » Fri May 24, 2019 12:21 am

Most investors say, do not worry, you invest for the long term, but long term is a matter of age. If you are a retired investor who have accumulated enough to fund the pension and do not need to take unnecessary risk to make it, being equity aggressive (greediness) may not be such a good idea. And it is not only because returns are not so much different between equities and fixed income, but because we have had a long and incredibly good run since 2009, and it is not if, but when a major equity fall will happen. It took years to return to the same place in 2008.

Topic Author
alex123711
Posts: 93
Joined: Sun May 20, 2018 5:01 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by alex123711 » Fri May 24, 2019 1:29 am

Good point, for example I think from 1999 it took until 2007 to get back to the same level.. and then crashed the next year, and then was under the level again until 2013, so really it took from 1999 to 2013 to get back above that level consistently

User avatar
sapphire96
Posts: 55
Joined: Fri Jun 16, 2017 8:08 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by sapphire96 » Fri May 24, 2019 6:05 am

RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Fri May 24, 2019 6:31 am

Thesaints wrote:
Fri May 24, 2019 12:10 am
SovereignInvestor wrote:
Thu May 23, 2019 11:56 pm
That remark about inflation is irrelevant. You're using a number that doesn't reflect inflation by only referencing real GDP. Whether there's high or low ibflation is irrelevant I assume 2% real GDP growth so nominal GDP grows 2% above inflation.
I did not mention inflation at all.
There seems to be mischaracterization of buybacks. Buyback is like a dividend. So yes when a the S&P consistently pays out such little profit in dividend that it buys back 3% of the shared annually as it has on average since 2005, then yes the earnings per share will grow 3% faster than total nominal earnings grow.

It is not expanding profits...only on a per share basis. If they paid the 3% in extra dividend then investors can get 3% more shares if they reinvest...instead each share produces 3% more profit. Dividend versus buyback is irrelevant....math is the same.
The math is that if they pay 2% in dividends and another 3% in buyback, earnings have to grow more than 5%, otherwise there is no space for expansion.
You're using TTM pE...the same PE that was like 50 in 2009 and sky high in 2017 and was backward looking and said avoid stocks before the biggest rallies we've seen.
Yes, in 2009 the denominator was close to zero.
Maybe you don't understand my point. I'm saying that we can't exclude P/E might be around 15 in 2029; who can tell ? In that case the next decade annualized return might very well be under 4%.
The market prices for the future. Forward operating PE is much better...yes it's biased high due to optimism but it always has the bias so relative comparisons across time are useful.
That's nice. Too bad future earnings are not known.
Not everything is 1999 or a bubble...

Talking about 1999, then the forward PE on the S&P was 25 and one can park cash in 10Y T bonds and get 6%.

Now the forward PE is 16 and 10Y bonds onpy offer 2.3%. The suggestion that the current valuations is remotely similar to 1999 is just way off base.
In fact, I'm not making it.
Yes of course valuations can go to 2012 low levels...great point. But average forward PE since 19995 is 17. The lowest period was 2008 to 2012. From 1995 to present it ranged from 10 to 25. In 2012 it was 12...that is on the low side. For every 2012 PE of 12 there can also be a 22 PE which is near the top end and that would mean the market trades 40% above current level.
Are you saying that we will never see a P/E under 15 ? It sounds like a very bold prediction.

[quoteIMO the only reason why valuations got so low in 2008-12 is from.fianncial criss and mean reversion because they went sky high in 1998-2001 and over corrected on downside.
It corrected 10 years later ???
2008 had nothing to do with 1998
[/quote]

Yes your post not only mentioned inflatiron it tried to criticize mine for making it seem like higher inflation is better. Your post mentioned hyperinflation.

Not true with earnings having to grow over 5%, yes that is if we get 4% annual PE contraction but you're assuming we contract to a very low PE.

Yes of course a 2012 PE can occur. But we are talking midpoint returns. I am just saying I believe Vanguard middle range returns are too low. When making a forecast of course the ending PE has huge impact but for the mid range you'd generally pick an average PE to end and 2012 is well below average so that should likely be a lower percentIle forecast.

If we are going to take extreme PE reading as midpoint I might as well say I expect -20% returns because the S&P can end at a PE of 1. It can happen but in terms of median range, the average forward PE Of last 25 years is above where it is today and those years reflected higher interest rates. So picking any significant PE contraction as mid point seems biased. Vanguard is doin that.

Assuming an ending PE of 12 as mid point estimate seems just as extreme as using a ending PE of 23.

Use TTM PE at ones own peril. It's not just 2009...it was 2017 as well. While TTM PE people say a High PE...the market looked ahead to a rebound from slowdown and massive tax cuts that led to 23% EPS growth for 2018.

The criticism makes it seem like I'm saying I have a crystal ball. Not at all...the forward PE is far from perfect but it is much better than looking backward.

Going into both 2017 and 2009 the trailing PE was very high. And didn't indicate the massive rebound in earnings that forward estimates did. The forward looking one has issues because although revisions are usually down over time in forward earnings they are not of same.magnitude but it is better than looking in rearview mirror.

As far as valuations since 1995..I said that is my opinion and cannot be totally proven. The logic is people respond to sentiment and chase returns and recency bias. In late 1990 valuatons were in bubble and then it crashed and in 2008 financial crisis people panicked and sold them off super low levels sonce they had recent bad experience in 2001-02. It happens a lot that once something is bubble it crashes below fair value. I mean the S&P arguably did it in 1970s...some say it was elevated in late 1960s with Nifty Fifty it crashed in 1973-4, and got more reasonable and then in 1980ish crash it became very cheap.

Oil as well....I think many would say 100+/Barrel was a bubble for most of 2012-14 but then it crashed to 26...seemed way below a normal price.

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Fri May 24, 2019 6:37 am

Also another serious issue with GAAP is in ignores all earnings for REITS..which are over 3% of the S&P. GAAP assumes commercial real estate depreciates over time which defies economics so most REITS have no earnings or losses.

TheOscarGuy
Posts: 860
Joined: Sat Oct 06, 2012 1:10 pm
Location: Where I wanna be.

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by TheOscarGuy » Fri May 24, 2019 6:58 am

alex123711 wrote:
Thu May 23, 2019 5:29 pm

What to do in this situation?

International returns prediction seems ok. What do they mean by this, as most total market indexes I have seen include a large portion of U.S is this still 'international' or would it be world ex U.S?
Keep calm and carry on with your financial plan ? :D
I am not sure what you can do with that information other than continue on your plan.
By international they likely mean ex-US.

RJC
Posts: 229
Joined: Fri Dec 14, 2018 1:40 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by RJC » Fri May 24, 2019 8:15 am

sapphire96 wrote:
Fri May 24, 2019 6:05 am
RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf
Did they forecast 8-12% for both US and international equities? Seems off the mark?

gjlynch17
Posts: 36
Joined: Wed Apr 15, 2015 12:32 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by gjlynch17 » Fri May 24, 2019 8:39 am

RJC wrote:
Fri May 24, 2019 8:15 am
sapphire96 wrote:
Fri May 24, 2019 6:05 am
RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf
Did they forecast 8-12% for both US and international equities? Seems off the mark?
According to Portfolio Visualizer, Vanguard's June 2009 predictions were fairly close to actual returns. U.S. equities performed slightly ahead of the 8%-12% baseline expected returns (14.96%) and international developed equities performed slightly below expected returns (6.94%). A 50/50 mix of U.S. and international returned 10.96%.

https://tinyurl.com/y623ubun

For the next 10 years, Vanguard's expected equity return of 6.0%-7.5% on a 50/50 U.S. and international portfolio seems realistic.
Last edited by gjlynch17 on Fri May 24, 2019 9:22 am, edited 1 time in total.

gjlynch17
Posts: 36
Joined: Wed Apr 15, 2015 12:32 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by gjlynch17 » Fri May 24, 2019 8:54 am

[Delete Duplicate Post]
Last edited by gjlynch17 on Fri May 24, 2019 9:23 am, edited 1 time in total.

dh
Posts: 363
Joined: Sun Mar 13, 2011 8:01 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by dh » Fri May 24, 2019 8:57 am

alex123711 wrote:
Thu May 23, 2019 5:29 pm

What to do in this situation?
Stick with your IPS diversification strategy and ignore predictions. Within the ten years each of those asset classes will have better years, the challenge is that you can't predict which one in any given year. See:

https://www.callan.com/periodic-table/

SovereignInvestor
Posts: 340
Joined: Mon Aug 20, 2018 4:41 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by SovereignInvestor » Fri May 24, 2019 9:33 am

gjlynch17 wrote:
Fri May 24, 2019 8:39 am
RJC wrote:
Fri May 24, 2019 8:15 am
sapphire96 wrote:
Fri May 24, 2019 6:05 am
RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf
Did they forecast 8-12% for both US and international equities? Seems off the mark?
According to Portfolio Visualizer, Vanguard's June 2009 predictions were fairly close to actual returns. U.S. equities performed slightly ahead of the 8%-12% baseline expected returns (14.96%) and international developed equities performed slightly below expected returns (6.94%). A 50/50 mix of U.S. and international returned 10.96%.

https://tinyurl.com/y623ubun

For the next 10 years, Vanguard's expected equity return of 6.0%-7.5% on a 50/50 U.S. and international portfolio seems realistic.
15% is more than slightly ahead of 8-12%. 8-12% is about average long term returns..15% is well above average. Seems their forecasts have been too low.probably bevause they use CAPE and think the valuations are higher than they really are.

flyingaway
Posts: 2290
Joined: Fri Jan 17, 2014 10:19 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by flyingaway » Fri May 24, 2019 9:59 am

I think the forecast is acceptable. If it were average annual return of 110%, then we know it is wrong.

User avatar
mickeyd
Posts: 4715
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by mickeyd » Fri May 24, 2019 10:06 am

What to do in this situation?
Print the article. Fold it up several times so that it fits into your wallet. Stuff it in your wallet. Never read it again.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

Nahtanoj
Posts: 12
Joined: Tue Apr 04, 2017 7:01 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Nahtanoj » Fri May 24, 2019 11:25 am

If you don't like Vanguard's forecast of equity returns, you can see what others are forecasting. Here is a link to a Morningstar article that collects recent forecasts from a variety of sources, including both Vanguard and Jack Bogle: https://www.morningstar.com/articles/90 ... rns-2.html

Bogle's forecast as of last October was, "in the 4% to 5% range is just for the fun of it, for stocks." (These would be nominal returns, so figure 2 - 3% real.) This was based on his usual method of "fundamental return" (dividends plus dividend growth) plus "speculative return" (which he was estimating would be slightly negative over the next 10 years).

Will the actual returns be higher or lower than the estimate? The answer is "yes" - and possibly by quite a lot.

Maybe this sort of exercise is not useful for making investment decisions, but it may be useful for making financial planning decisions (at least for people whose financial plans involve funding future expenses from a portfolio that includes stocks).

Seasonal
Posts: 324
Joined: Sun May 21, 2017 1:49 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Seasonal » Fri May 24, 2019 11:30 am

SovereignInvestor wrote:
Thu May 23, 2019 5:57 pm
US equity return forecasts seem way too low. The buyback + dividend yield is over 5%. What sort of stagnation and/or deflation are they forecasting?

Yet the expect 2% real GDP growth. AND assume 2% inflation which implicitly means 4% nominal GDP growth.

What high valuations do they mean? Forward PE is below the average going back to mid 1990s, yet rates are way lower than average.

Basically they're calling for 4% annual nominal GDP growth and with 5% shareholder current yield the only way to get only 5% nominal returns is to have valuatons contract 4% per year or about 35%. So that would mean the S&P is trading at 11 x forward earnings in 10 years and would have 7.5% shareholder yield if capital return payout ratios stay the same and earnings growth with their GDP forecast.

All their forecasts make sense except the return one..not consistent with everything else they project. I hope they're not also a victim of CAPE.
Not all of GDP growth goes to existing companies. Some of it goes to new companies.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Thesaints » Fri May 24, 2019 1:18 pm

SovereignInvestor wrote:
Fri May 24, 2019 6:31 am
Not true with earnings having to grow over 5%, yes that is if we get 4% annual PE contraction but you're assuming we contract to a very low PE.
To begin with, P/E=15 is not "very low" by any stretch of imagination. It is actually very close to its historical average.
Granted, with treasuries yielding <3% a P/E≈15 is quite different from when they yield 6%, but we can't accurately forecast interest rates in 2029, although my guess would be for the lower side, rater than the high side (in historical terms).

User avatar
whodidntante
Posts: 5596
Joined: Thu Jan 21, 2016 11:11 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by whodidntante » Fri May 24, 2019 1:23 pm

100% world ex-USA FTW?

RetiredArtist
Posts: 83
Joined: Wed Aug 26, 2015 4:38 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by RetiredArtist » Fri May 24, 2019 1:52 pm

gjlynch17 wrote:
Fri May 24, 2019 8:39 am
RJC wrote:
Fri May 24, 2019 8:15 am
sapphire96 wrote:
Fri May 24, 2019 6:05 am
RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf
Did they forecast 8-12% for both US and international equities? Seems off the mark?
According to Portfolio Visualizer, Vanguard's June 2009 predictions were fairly close to actual returns. U.S. equities performed slightly ahead of the 8%-12% baseline expected returns (14.96%) and international developed equities performed slightly below expected returns (6.94%). A 50/50 mix of U.S. and international returned 10.96%.

https://tinyurl.com/y623ubun

For the next 10 years, Vanguard's expected equity return of 6.0%-7.5% on a 50/50 U.S. and international portfolio seems realistic.
In Portfolio Visualizer, you can check "logarithmic scale". Although I sort of know how it works for earthquakes, I am unsure what it means here. So I looked up the definition:
A logarithmic scale is a nonlinear scale used for a large range of positive multiples of some quantity. ... It is based on orders of magnitude, rather than a standard linear scale, so the value represented by each equidistant mark on the scale is the value at the previous mark multiplied by a constant.
Can someone explain (in a general way) logarithmic scale in this context to someone who has forgotten Algebra II?
Thanks!

User avatar
DanMahowny
Posts: 885
Joined: Sun Aug 06, 2017 8:25 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by DanMahowny » Fri May 24, 2019 1:57 pm

The "Dan Mahowny 10-year Forecast" says the equity percentages in the Vanguard Forecast are way too high.
Funding secured

GCD
Posts: 949
Joined: Tue Sep 26, 2017 7:11 pm

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by GCD » Fri May 24, 2019 1:58 pm


bizkitgto
Posts: 48
Joined: Tue Mar 14, 2017 11:54 am

Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by bizkitgto » Fri May 24, 2019 2:01 pm

RetiredArtist wrote:
Fri May 24, 2019 1:52 pm
gjlynch17 wrote:
Fri May 24, 2019 8:39 am
RJC wrote:
Fri May 24, 2019 8:15 am
sapphire96 wrote:
Fri May 24, 2019 6:05 am
RJC wrote:
Thu May 23, 2019 9:02 pm
Anyone have their forecast from 5-10 years ago? How did they do?
From June 2009 https://personal.vanguard.com/pdf/icrecm.pdf
Did they forecast 8-12% for both US and international equities? Seems off the mark?
According to Portfolio Visualizer, Vanguard's June 2009 predictions were fairly close to actual returns. U.S. equities performed slightly ahead of the 8%-12% baseline expected returns (14.96%) and international developed equities performed slightly below expected returns (6.94%). A 50/50 mix of U.S. and international returned 10.96%.

https://tinyurl.com/y623ubun

For the next 10 years, Vanguard's expected equity return of 6.0%-7.5% on a 50/50 U.S. and international portfolio seems realistic.
In Portfolio Visualizer, you can check "logarithmic scale". Although I sort of know how it works for earthquakes, I am unsure what it means here. So I looked up the definition:
A logarithmic scale is a nonlinear scale used for a large range of positive multiples of some quantity. ... It is based on orders of magnitude, rather than a standard linear scale, so the value represented by each equidistant mark on the scale is the value at the previous mark multiplied by a constant.
Can someone explain (in a general way) logarithmic scale in this context to someone who has forgotten Algebra II?
Thanks!
It's simple way to display exponential growth in a linear fashion.
Keep it simple: 20% BND, 50% VTI and 30% VXUS

Post Reply