The One Market Sector To Rule Them All
Not one, but two reports recently published by high-profile investment firms paint a bleak picture for stock market returns in the years ahead.
The findings in these reports are worth paying very close attention to.
Minus 4.7% per year…
That’s how poorly U.S. large-cap stocks are likely to perform over the next seven years, according to Jeremy Grantham, chief investment strategist for global investment firm GMO.
After all, the bull market that began in 2009 is getting long in the tooth.
But negative real returns close to minus 5% per year is a scenario most investors today are simply not prepared for.
Grantham is a legendary value investor, and there’s no arguing that the valuation of the S&P 500 is expensive by nearly any measure you chose to apply.
It’s no surprise then that a value-oriented firm like GMO doesn’t see much upside ahead for U.S. stocks.
As you can see in their latest asset class return forecasts in the chart above.
In fact, there’s not much to like in any U.S. asset class pretty much across the board.
Large-cap stocks (-4.7%), small-cap stocks (-3%), and U.S. bonds (-1%) all carry negative annual return expectations for the next seven years.
If there’s one bright spot to hinge on, it will be emerging markets.
GMO expects emerging market stocks to return plus 1.5% per year over the next seven years, while emerging market bonds should return 0.5% a year.
This is why I’m increasing emerging markets in my own asset allocation.
Plus, these markets are cheap and have better growth prospects than just about anywhere else in the world today.
And GMO is not alone in their downbeat forecast for U.S. stocks.
In a research note published this week, Wall Street giant Morgan Stanley warned that “investors need to prepare for downside as the end of the economic cycle is near,” as reported by Bloomberg.
“There’s less reason to behave like it’s ‘morning in America’ than ‘happy hour in America’… Closer to the end of the day than the beginning,” as Morgan Stanley’s strategists cleverly note.
Stock market valuations are stretched to the upside and investors can’t expect big stock market returns year-after-year to last forever.
The GMO and Morgan Stanley reports forecast a cautionary tale.
However, there’s a silver lining.
Many of the best stock market gains may still be in store for us.
I’ll explain why in detail in my next Wealth Watch.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch