As we turn the page to the new year, it’s that time again—time for the analysts to release their stock market forecasts. These predictions inevitably make headlines, and many investors wonder if they should take action based on them.
Look, it is hard enough to predict what will happen next week, let alone next year or over a decade. I get that the forecasts are mainly for water cooler talk and ratings, but they really serve little purpose besides entertainment.
I know what you’re thinking; how can high-paid analysts and economists not have better insight than the average person? The truth is they don’t when it comes to predicting market returns. As we always stress, markets are complex and composed of many factors, making them unpredictable and the prediction of them a fool’s errand.
If the last two years have taught us anything, it is that accurately predicting markets in the short term is nearly impossible. What we do know is that long-term equity returns tend to be similar over most 20-year periods.
Predicting that markets will only slightly increase or decrease is not an attention grabber. It is more “exciting” to make bold predictions, especially when there is no accountability and by the time they inevitably don’t come to fruition, no one remembers them anyway.
I bring this up because the “predictions” for this decade don’t look promising.
Past Predictions
Before we dive in, it is important to note that at the start of 2020, many were calling for lackluster returns for the coming decade.
Multiple firms forecast low to no returns for the foreseeable future, and that was before the pandemic! Had they known about the pandemic, I can only imagine how much more negative these predictions would have been.
Research Affiliates: Forecast 0.3% returns for U.S. large caps over the next decade.
Morningstar: Forecast a 1.7% return for U.S. stocks over the next decade.
Grantham Mayo Van Otterloo (GMO): Forecast negative 4.4% real (inflation-adjusted) returns for U.S. large caps over the next seven years.
Vanguard: Forecast nominal U.S. equity-market returns in the 3.5% to 5.5% range over the next decade.
To be fair, a few firms were a tad more optimistic:
J.P. Morgan: Forecast a 5.6% return assumption (nominal) for U.S. equities over a 10- to 15-year horizon.
BlackRock Investments: Forecast a 6.1% nominal (non-inflation-adjusted) mean expected return for U.S. large-cap equities over the next decade.
Figures from Morningstar.
Now, here’s the thing: We are only a little over two years into the decade and still grappling with the pandemic, and yet the S&P 500 Index (U.S. large caps) is up an eye-popping ~52%!
If it were to return 0% for the rest of this decade, which is highly unlikely, that’s still a 5.2% annualized return! It should be noted that similar returns apply to U.S. mid- and small-cap stock indices.
Think about that for a second: If the S&P 500 doesn’t increase a penny from its current level over the next eight years, the annualized returns will still match or outperform nearly every forecast for the decade. What does that tell you? It tells me what I’ve known for a while—no one has any idea!
Future Predictions
With that said, I was curious to see analysts’ predictions after what turned out to be a great year in 2020.
Now, in addition to being far too conservative in 2020 and 2021, nearly every forecast also called for developed and emerging markets to significantly outperform their U.S. counterparts. So far, that hasn’t panned out, and while all have positive returns, the S&P 500 has led the way.
Source: Morningstar.
While there are many legitimate reasons to favor developed and emerging markets moving forward, this forecast has fallen short and preaches the importance of maintaining a properly diversified portfolio.
The rationale for those predicting developed and emerging markets to outperform the U.S. relies on four pillars:
Persistently high inflation will have a bigger impact on U.S. markets.
The U.S. will have record-high stock market valuations compared with every foreign market.
The Federal Reserve’s pledge to start removing the punch bowl in the form of unlimited stimulus and near-zero interest rates will be a drag on U.S. equities.
After a sluggish start due to lockdowns and a slower vaccination rollout, the Eurozone is poised for higher growth prospects over the coming years.
While I agree with much of the rationale above, the tide could turn tomorrow or take a few more years. That’s the thing with markets—there is no real predictability in the short term as much is based on sentiment and momentum.
The predictions from the major banks for 2022 range from a small decline to another year of double-digit returns. These returns are based on their forecast models, which have been proven inconsistent at best.
Inevitably, one of these forecasts will likely be “close,” while the others will be forgotten about until we deal with this again for 2023.
Conclusion
I know everyone is waiting for my bold prediction for 2022. My answer? Heck if I know! The last two years have been difficult on so many levels; there is no reason to make this time harder than it needs to be. Take the headlines with a grain of salt, and focus on what you can control.
Discuss your situation with a fee-only financial advisor.
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