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

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

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

RetiredArtist wrote:
Fri May 24, 2019 1:52 pm

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!
Pretty much, graphing on a log scale just makes exponential growth look linear. For example, doubling from 10,000 to 20,000 looks the same as doubling from 100,000 to 200,000 on a log scale. On a linear scale, the latter looks like a much larger change.

Dottie57
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Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Dottie57 » Fri May 24, 2019 2:06 pm

Seriously, I am happy with those numbers. My retirement plan may even make some gains. Using mostly CDs for next 7 years. Then SS and RMDs.

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

Post by Thesaints » Fri May 24, 2019 2:47 pm

RetiredArtist wrote:
Fri May 24, 2019 1:52 pm
Can someone explain (in a general way) logarithmic scale in this context to someone who has forgotten Algebra II?
Thanks!
If you plot your assets running value on a linear scale, earning $1000 looks just the same when your initial capital is $1,000 (100% gain) and when it is $1,000,000 (0.1% gain).
On a logarithmic scale instead gain rates are displayed equally. So your first $1,000 gain will look like a big jump, but to get an equal jump again you have to make $2,000, now that your capital has become $2,000.

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

Post by azanon » Fri May 24, 2019 2:51 pm

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?
What to do? Why make an ETF that rotates holdings based on these predictions! There's a darn ETF for just about everything, so I don't know why someone's not jumping on this. 5-Trillion-dollar AUM Vanguard is publishing their collective wisdom for someone to exploit!

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

Post by JackoC » Fri May 24, 2019 2:56 pm

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.
As was covered just recently here:
viewtopic.php?f=10&t=281369&p=4552209#p4552209
it's much too optimistic to assume Earnings Per Share grows at the same speed as the economy *and* add to it 3+% for buybacks. In the 20th century real EPS grew almost 2% pa slower than real GDP mainly due to dilution of existing shareholders by new capital companies have to raise in the real world to grow earnings as fast as GDP expands.

The most optimistic take going forward would be that increased buybacks are filling in some of that hole now. But the paper I presented in the linked thread found that the net rate of dilution was no less of a subtraction from EPS growth in the 21st century through 2014 than it had been in the 20th century. Some years nowadays, per their findings, companies 'anti-dilute' with peak buybacks, but on average they still dilute at close to 2% pa *including* buybacks.

The add-on if any to an estimate of E[r]=EPS growth=GDP growth+cash dividend, is doubtful. GDP+5% as stock expected return is clearly too optimistic.

Also it's contradictory to invoke 'forward PE' as a valuation metric but a cyclically adjusted PE be something anyone is a 'victim' of. PE is fundamentally tied to valuation by the Dividend Discount Model, same one we are basically using to say E[r]=dividend+dividend growth, reasonably assuming dividend growth=EPS growth, though again much more dubious to assume EPS growth=GDP growth. The equation E[r]=1/PE is just a rearrangement of the Gordon Growth version of DDM and taking real (not nominal) terms:
https://www.investopedia.com/articles/04/012104.asp

And averaging 'E' over some years is just common sense, to avoid projecting E[r] from peak or trough earnings. Hence, 1/PE[10] currently in the mid 3% range, implying that as the expected real return with no reduction in valuation, in the middle of Vanguard's range of 4-6% nominal, 2-4% real.

And again it's a contradiction to point to today's low 'riskless' (real) rates without considering the implication for stock returns. In an efficient market where riskless rates are lower, so are expected stock returns, unless equity risk has become higher. I see no reason to assume that. At a minimum we'd assume real E[r] stocks is at least as much lower than long term past historical stock returns by as much as today's real riskless bond yields are lower than historical real return on bonds, on the order of 1-2% pa lower. But, spreads over the riskless rate on risky bonds are lower than they used to be too, implying the premium earned for taking risk is also lower than it was, which together gets you to about the upper end of Vang's estimate.

As to what to do with Vanguard's numbers, I would say basically nothing in allocation terms, least as far as US stocks in isolation or relative to US 'riskless' bonds (again if you really believed today's clearly lower riskless long term bond yields don't imply at least commensurate reduction in expected stock returns, you'd pile into US stocks v US bonds...but that's a tortured assumption IMO). The only comparison which suggests anything about allocation is their contention that foreign stock E[r] is 3.5% pa higher than US, which is a somewhat aggressive statement IMO. Otherwise, recognizing that expected returns are now considerably lower than historical realized returns would mainly imply saving more or planning to work longer and/or spend less in retirement, not allocation changes.

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

Post by Thesaints » Fri May 24, 2019 3:03 pm

Agree on all and I may add: projected bond yields are low. That is a further challenge for the balanced 60/40, or 50/50, portfolio. The "4% SWR" may not be as safe when expected returns are lower than 4%. In the Trinity study the average return of their 50/50 portfolio was well over 4% real. Using Vanguard figures, we may be looking at only half as much.

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

Post by SovereignInvestor » Fri May 24, 2019 10:55 pm

First I'm assuming the earnings grow with US GDP bevause thst is conservative because half the sales are foreign and foreign GDP is projected to grow over 1% point higher than US per IMF.

Not all growth goes to new companies...I'm not assuming growth goes to new companied. Definitionally all assuming earnings grow with GDP does is assume the share of S&P profits to GDP stays constant..which means there is growth going to non S&P companies.

If SPX is 500B and economy is 1T, S&P is 50%. If economy doubled to 2T and SPX doubles to 1T then S&P grew with economy but not all the 1T growth in economy went to SPX, half went to non SPX. Not sure why you said I imply all growth goes to s&a bevause that's not the case. If it was then S&P earnings would grow faster than economy.


Second companies don't issue stock for capital like they did in the 20th century. I wouldn't impose older levels of dilution in current market. There was much greater CAPEX needs for immature economy. Now companies have way more capital than they need and return it mostly.

Third, I agree about risk premiums and that is why I think CAPE and Vanguard's return forecasts are off base.the historical average risk premium of S&p to 10yr note is just under 5%.

The 10yr note is 2.5% ballpark rounded. That would Mean an efficient market would have stock returns in the 7% or so range.

The 10Y has averaged under 3% this decade yet every CAPE and vanguard forecast is showing below average risk premiums. When they keep forecasting like 5-6% returns. It's bevause they're using CAPE which keeps saying stocks are over valued more than they are bevause of litany of data consistency issues.

Yeah it's important not to use cyclically high earming but using earnings from 10 years ago does more than moderate cylciality it goes back so far an uses irrelevant earnings especilly with buybacks making prospective earnings be so much higher than older years on PER share basis.

Forward PE in conjunction with being cognizant of cycle is sound. If earnings have growt non stop for years then taking raw Forward earnings is reckless..shave something off for downturn. Right now forward earnings are 3% below the october 2018 peak..and over 8 months they'd usually be up around 4-5% so they're off about 7% from peak trend. So they're probably cyclically high but not thst far from middle so any forward PE maybe should be discounted a little. Likely wise in early 2016 the forward earnings were down about 6% 2 years after peaking in 2014, which us more like 15% off trend and probably below mid cycle.

Yeah that's not something one can plug into a formula but if it was that easy algorithm would have at making market more efficient and we'd be wasting out time discussing this stuff.

Juse dont see utility of using earnings from 2010...the relevancy goes away. There are better ways to adjust for cycle than using earnings 10 years old which bring up relevancy issues.

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

Post by HomerJ » Sat May 25, 2019 12:19 am

nisiprius wrote:
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."
Or, instead of waiting 10 years, check the reports they put out 10 years ago, and 9 years ago, and 8 years ago, and see how wrong they were.

Here's a fun quote from Vanguard from 2011
Professor Tetlock’s research includes reviewing the accuracy of roughly 30,000 predictions from 300 experts on political and economic matters during a 20-year period ending in 2003. He also looked at how often these experts got cited in the media as a gauge of their fame and potential impact. “As a whole, experts were slightly more accurate than the proverbial dart-throwing chimpanzee,” he said. “We also found a rather perverse inverse relationship between how famous experts were and how accurate they were.”

The desire for control

Still, although many predictions miss their mark or are ill-timed, people continue to listen to them avidly. “There is a deep-rooted need to believe that we live in a predictable and controllable universe,” Professor Tetlock said, and we anticipate regret if predictions we don’t follow later turn out to be true. The result is demand outstripping supply in the forecasting business, with a lot of dubious claims helping to fill the market gap. Meanwhile, experts failed to predict the nuclear disaster lying in wait for earthquake prone Japan, to take just one recent example.

Such unexpected events can affect financial markets significantly in the short term, which is one reason Vanguard advises investors to disregard short-term noise and focus on a long-term investment plan. So, the next time you hear an expert make a bold prediction, keep this caution from Professor Tetlock in mind: “It is a big mistake to confuse entertainment value with truth value.”
The J stands for Jay

Norsky19
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Re: Vanguard issues 10-year forecast for stock, bond market returns

Post by Norsky19 » Sat May 25, 2019 1:41 am

I predict the market will fall between 0%- 20% over the next decade.....give or take.


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

Post by Tdubs » Sat May 25, 2019 6:08 am

bizkitgto wrote:
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


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.
The Y axis is graduated by multiples of 10. So you would see lines like 1, 10, 100, 1000, 10,000, etc. It takes growth rates that on a linear scale would look like a curve to infinity and flattens them out. Like this.

Image

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

Post by LittleD » Sat May 25, 2019 7:05 am

So, what is Vanguard and several other long term forecasters predicting: I take these 4-5% long term projections for returns only one way...That is we are going to have another substantial recession and major correction in the equity markets. If we get a 30-60% decline in the SPX, the forward forecasts will quickly increase back to a near normal 9-10% return going on in time. A recession is due since we seem to have some kind of economic downturn every 5-7 years. Those of you who are diversified with buy and hold and have a fair amount of fixed income will just hold tight and ride the camel. The markets always make a comeback so if you are in the accumulation stage no worries.

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

Post by Tycoon » Sat May 25, 2019 8:18 am

HomerJ wrote:
Sat May 25, 2019 12:19 am
Or, instead of waiting 10 years, check the reports they put out 10 years ago, and 9 years ago, and 8 years ago, and see how wrong they were.
Given the inacuraccy of past reports, I question why investors would act on these prognostications? One of the things that baffles me (there are many), is why seemingly intelligent people keep lending credence to these forecasts. These forecasts always seemed silly to me.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. How consistantly wrong do predictions have to be before the faithful learn?

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

Post by Mr.BB » Sat May 25, 2019 8:20 am

Do a Google search for 2009 or 2008 10 year predictions from various companies and people see how well they did. Should make for an interesting comparison.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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

Post by southerndoc » Sat May 25, 2019 8:36 am

Tycoon wrote:
Sat May 25, 2019 8:18 am
HomerJ wrote:
Sat May 25, 2019 12:19 am
Or, instead of waiting 10 years, check the reports they put out 10 years ago, and 9 years ago, and 8 years ago, and see how wrong they were.
Given the inacuraccy of past reports, I question why investors would act on these prognostications? One of the things that baffles me (there are many), is why seemingly intelligent people keep lending credence to these forecasts. These forecasts always seemed silly to me.
Where do you get that the Vanguard reports have been inaccurate? They've usually done well from what I've read. Their 2009 report was spot on.

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

Post by Mr.BB » Sun May 26, 2019 9:03 am

From Vanguards summary 2008-2009 report.

Conclusions In this paper we have analyzed more than a century’s worth of market and economic data to gain perspective on what the financial crisis of 2008 may mean for the U.S. economy and the market itself in 2009 and beyond.
Three key implications of this analysis are as follows:
• The U.S. stock market—as a leading economic indicator—is already pricing in an extremely severe U.S. recession for 2009 that would be approximately twice as severe as the deep U.S. recessions of 1974 and 1982, although not nearly as devastating as the Great Depression of the 1930s.
• Based on nearly 140 years of U.S. data, neither the level of realized volatility, nor the return of the stock market in the previous year, has been a meaningful predictor of the market’s return in the following year.

• 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%.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

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

Post by SovereignInvestor » Sun May 26, 2019 9:09 am

LittleD wrote:
Sat May 25, 2019 7:05 am
So, what is Vanguard and several other long term forecasters predicting: I take these 4-5% long term projections for returns only one way...That is we are going to have another substantial recession and major correction in the equity markets. If we get a 30-60% decline in the SPX, the forward forecasts will quickly increase back to a near normal 9-10% return going on in time. A recession is due since we seem to have some kind of economic downturn every 5-7 years. Those of you who are diversified with buy and hold and have a fair amount of fixed income will just hold tight and ride the camel. The markets always make a comeback so if you are in the accumulation stage no worries.
Or Vanguard can be too pesimistic like they have been the las decade.


50% crashes happened what 4 times in the last century. Banking on one in a 10 year period is a slight long shot.

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

Post by SovereignInvestor » Sun May 26, 2019 9:10 am

Also there is a risk of banking on a recession. Australia is a very developed economy and hasn't had one for over 20 years.

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

Post by vineviz » Sun May 26, 2019 9:35 am

SovereignInvestor wrote:
Sun May 26, 2019 9:09 am
LittleD wrote:
Sat May 25, 2019 7:05 am
So, what is Vanguard and several other long term forecasters predicting: I take these 4-5% long term projections for returns only one way...That is we are going to have another substantial recession and major correction in the equity markets. If we get a 30-60% decline in the SPX, the forward forecasts will quickly increase back to a near normal 9-10% return going on in time. A recession is due since we seem to have some kind of economic downturn every 5-7 years. Those of you who are diversified with buy and hold and have a fair amount of fixed income will just hold tight and ride the camel. The markets always make a comeback so if you are in the accumulation stage no worries.
Or Vanguard can be too pesimistic like they have been the las decade.


50% crashes happened what 4 times in the last century. Banking on one in a 10 year period is a slight long shot.
On the other hand, if nominal returns over the next five years are greater than 2%, the 15-year period ending in 2024 will be one of the best in history. That seems like an even more unrealistic expectation to me.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by SovereignInvestor » Sun May 26, 2019 10:01 am

Not that unrealistic for 2009-2024 to be the best in history when in 2009 it was the bottom of a severe crash and 2000-2009 saw negative 2% annualized returns, basically among the worst in history.

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

Post by vineviz » Sun May 26, 2019 11:54 am

SovereignInvestor wrote:
Sun May 26, 2019 10:01 am
Not that unrealistic for 2009-2024 to be the best in history when in 2009 it was the bottom of a severe crash and 2000-2009 saw negative 2% annualized returns, basically among the worst in history.
If your investment plan depends on ten above-versus years being followed by five more above-average years then I hope you’re living at Lake Wobegone.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by SovereignInvestor » Sun May 26, 2019 12:51 pm

The 10 above average year comment is cherry picking from 2009 to 2019. If we said 12 years from 2007 to 2019 then it was noticeably below average.

It's like saying gold is a great investment because it outperformed the S&P since 1999.

Also your first comment said the next 5 years only need anemic returns...now your saying they need to be above average, which one is it?

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

Post by vineviz » Sun May 26, 2019 1:04 pm

SovereignInvestor wrote:
Sun May 26, 2019 12:51 pm
It's like saying gold is a great investment because it outperformed the S&P since 1999.
Actually I’m only pointing out that expecting unlikely events to repeat indefinitely is not the basis of a sound financial plan.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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

Post by Jags4186 » Sun May 26, 2019 1:15 pm

In 2009 Vanguard said 10 year returns for US equities would be in the 8-10% range.

They were off in the 3-5% range.

They know nothing more than anyone else.

Page 2:

https://personal.vanguard.com/pdf/icrsme.pdf

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

Post by SovereignInvestor » Sun May 26, 2019 5:34 pm

:sharebeer 8-)
vineviz wrote:
Sun May 26, 2019 1:04 pm
SovereignInvestor wrote:
Sun May 26, 2019 12:51 pm
It's like saying gold is a great investment because it outperformed the S&P since 1999.
Actually I’m only pointing out that expecting unlikely events to repeat indefinitely is not the basis of a sound financial plan.
Right but not seeing how it's unlikely that stocks return at least 2% nominally for next 5 years, that is well below average.

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

Post by marcopolo » Sun May 26, 2019 6:39 pm

vineviz wrote:
Sun May 26, 2019 9:35 am
SovereignInvestor wrote:
Sun May 26, 2019 9:09 am
LittleD wrote:
Sat May 25, 2019 7:05 am
So, what is Vanguard and several other long term forecasters predicting: I take these 4-5% long term projections for returns only one way...That is we are going to have another substantial recession and major correction in the equity markets. If we get a 30-60% decline in the SPX, the forward forecasts will quickly increase back to a near normal 9-10% return going on in time. A recession is due since we seem to have some kind of economic downturn every 5-7 years. Those of you who are diversified with buy and hold and have a fair amount of fixed income will just hold tight and ride the camel. The markets always make a comeback so if you are in the accumulation stage no worries.
Or Vanguard can be too pesimistic like they have been the las decade.


50% crashes happened what 4 times in the last century. Banking on one in a 10 year period is a slight long shot.
On the other hand, if nominal returns over the next five years are greater than 2%, the 15-year period ending in 2024 will be one of the best in history. That seems like an even more unrealistic expectation to me.
But, the last 10 years did not happen in a vacuum.
Was the outsized gains that unusual following the kind of downturn we had?

If we get the 2% nominal, the 15 yr performance may be amongst the best, but how about the 20 yr performance, probably pretty pedestrian.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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

Post by DB2 » Sun May 26, 2019 8:14 pm

Jags4186 wrote:
Sun May 26, 2019 1:15 pm
In 2009 Vanguard said 10 year returns for US equities would be in the 8-10% range.

They were off in the 3-5% range.

They know nothing more than anyone else.

Page 2:

https://personal.vanguard.com/pdf/icrsme.pdf
Maybe they were underestimating buybacks?

https://www.cnbc.com/2019/05/25/the-sto ... hares.html

"Data compiled by Ned Davis Research shows the S&P 500 would be 19% lower between 2011 and the first quarter of 2019 without buybacks.
The other options for companies to deal with that cash — holding it, reinvestments and dividends — would have also led to lower returns.
“Without focusing too much on numbers, we can say that the S&P 500 index would probably be lower today if not for buybacks versus other uses of cash,” says Ed Clissold, chief U.S. strategist at Ned Davis Research."

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

Post by JackoC » Wed May 29, 2019 3:46 pm

SovereignInvestor wrote:
Fri May 24, 2019 10:55 pm
1. First I'm assuming the earnings grow with US GDP bevause thst is conservative because half the sales are foreign and foreign GDP is projected to grow over 1% point higher than US per IMF.

2. Not all growth goes to new companies...I'm not assuming growth goes to new companied. Definitionally all assuming earnings grow with GDP does is assume the share of S&P profits to GDP stays constant..

3. Second companies don't issue stock for capital like they did in the 20th century. I wouldn't impose older levels of dilution in current market. There was much greater CAPEX needs for immature economy. Now companies have way more capital than they need and return it mostly.

4. Third, I agree about risk premiums and that is why I think CAPE and Vanguard's return forecasts are off base.the historical average risk premium of S&p to 10yr note is just under 5%.

5. The 10yr note is 2.5% ballpark rounded. That would Mean an efficient market would have stock returns in the 7% or so range.

6. Yeah it's important not to use cyclically high earming but using earnings from 10 years ago does more than moderate cylciality it goes back so far an uses irrelevant earnings especilly with buybacks making prospective earnings be so much higher than older years on PER share basis.
1. There's some validity to that, but it probably doesn't make a huge difference if world trend is 3% real v US 2% real, and additionally if one considers how globalization seems to be somewhat seriously threatened now (trade no longer growing faster than world GDP)'

2. It's not that profits can't grow as fast as GDP. It's that for all of modern financial history it's taken new capital to do that, thus the earnings per share to existing holders grows substantially slower than GDP.

3. You'd have to provide a lot more evidence of that I believe for anyone to accept that dilution has come to a screeching halt. And again look at the Research Associates paper in the linked thread: that found net dilution *including buybacks* barely changed in the 21st century through 2014 from the original Arnott Bernstein finding from early to end of 20th century.

4. The point is that if you look at other forms of risk premia like those on risky bonds, they are distinctly lower now than historical average. Which is completely consistent with rising stock valuations. It doesn't mean either is 'wrong' or 'must' revert to earlier values (which would cause particularly low returns). Today's values could just as easily be appropriate for today's circumstances, but circumstances where there is less risk, and/or more capital chasing return. In which case you can't expect as much return going forward. This is the basic reason it's so arbitrary to assume expected returns are always equal to historical returns. There's loads of evidence of relatively more capital now chasing return relative to the opportunities for return. So each unit of capital can expect to get less return. It's not the end of the world, but OTOH there is simply no logical reason the expected return has to be the same now as what realized return came out in past, different situations. Valuations give us a good deal of information about this, though of course do not 'predict' the one and only future *realized* return. If we knew the future realized return of stocks, there'd be no risk and thus no expected compensation for risk. :happy

5. Real long term bond yields now are around 2% pa lower than historical realized long term real bond returns. That implies stock expected returns are at least that much lower than historical, *before* considering that risk premia are also generally compressed now compared to past average.

6. Anyone can quibble with the exact number of years used to average 'E' in the fundamental equation E[r]=1/PE. Recently PE10 of the S&P was 31, PE8 and PE6 both around 29. Just using very recent years is tending toward a snapshot of now, with the basic problem that things in general don't usually go as badly or well on average over the business cycle as at any given point in the cycle. It's again common sense to do some kind of averaging of 'E' in an estimate of expected return based on PE. Also it's kind of funny to assume the expected return is equal to the historical return for the past many decades or a century then say conditions 10 yrs ago are 'irrelevant'. :happy

TomCat96
Posts: 826
Joined: Sun Oct 18, 2015 12:18 pm

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

Post by TomCat96 » Wed May 29, 2019 5:48 pm

Vanguard knows best concerning global trends, geopolitical movements, legislation, and market dynamics. I don't know what machine they have to make this prognostication, but I anticipate it to be a large computer---call it the Stockpicker 2000.

Now considerably simpler is a prognostication by a company AIG, with respect to its own market, its own financial instruments, and its own filings.
The year was 2007. Ah yes.

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these Credit Default Swap transactions.”


or Fannie Mae in 2004.

“These supbrime assets are so riskless that their capital for holding them should be under 2 percent.”

Presintense
Posts: 259
Joined: Thu Nov 06, 2014 1:58 pm
Location: "Somewhere in the middle of America"

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

Post by Presintense » Wed May 29, 2019 6:29 pm

Sell everything and buy bitcoin. Wait, don't do that. Do whatever you were going to do before you read the forecast.
Performance = Potential - Distraction

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