Keep Strong Market Returns in Perspective

Face-to-face client meetings are a thing again in the Marks Group office. Oftentimes, those start with an exasperated retelling of trying times experienced during the pandemic, after which we usually conclude by saying, “At least the market is up!”

The S&P 500 has gained nearly 20% year-to-date and more than doubled since its low-point 18 months ago. As of Aug. 31, the S&P had risen seven months in a row. Fifty-four times this year, it closed at an all-time high. The positive momentum, in other words, has been unrelenting.

Truthfully, equity investors have been spoiled. 401(k) and IRA balances are bigger than ever. Retirement dates have been moved up. Those couples already retired have been able to spend more money without drawing down their portfolio. All of those are reasons to be thankful.

Let’s keep in mind, however, these exceptional returns are not the norm and this incredible run may be setting unrealistic expectations.

In the last 50 calendar years (1971-2020), the S&P 500 has averaged returns of 10.9% per year. The 30-year figure (1991-2020) is similar: 10.7%. Since 2011, however, the number has jumped to almost 14% per year. And that’s not including 2021.

Market forecasting can be an exercise in futility, but the world’s largest financial institutions still publish economic outlooks to reflect realistic forward-looking returns.

J.P. Morgan’s most recent Long-Term Capital Market Assumptions project annual returns of just 4.1% for U.S. Large Cap stocks over the next 10 to 15 years. Northern Trust just published a five-year outlook that forecasts global equities (meaning U.S. and international stocks) will increase 4.6% per year on average. The report also cites currently “stretched valuations” and mentions that U.S. stocks specifically “have defied gravity for some time.”

Some will argue the Federal Reserve and other central banks have manufactured an environment that promotes rising equity prices and backstops any economic weakness. A new paradigm, so to speak. It is certainly true that monetary stimulus has contributed to higher equity returns in the last decade. What’s also true is the same stimulus is already contributing to the most significant inflation we’ve seen since the Great Recession.

The fact those 14% average annual returns since 2011 have been accompanied by exceptionally low inflation makes them even more valuable. And even less likely to be duplicated. Even if future equity performance remains better than historical averages, higher inflation will eat into real returns.

Stock valuations and corporate earnings are other factors that traditionally have major effects on future returns. The forward price-to-earnings ratio for the S&P 500 is 21, notably higher than its 10-year average of 16.3.

Earnings growth, meanwhile, has almost certainly peaked given the latest quarterly numbers were being measured against the depths of last year’s economic shutdown.

None of this is meant to imply a major correction is imminent. Markets are inherently unpredictable and one of the lessons from the last 18 months is that momentum can be incredibly powerful. From a planning perspective, however, investors should expect more modest portfolio returns. That applies to fixed income as well, considering lower bond yields.

It’s more fun to think about best-case scenarios, but our job as advisers is to provide the best information and perspective we can to guide investors toward financial success. Most of the signs point toward lower returns in the years ahead.

Plan accordingly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.



Ben Marks & Brett Angel

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