I don’t do market forecasts.
Sure, I have an idea of what I expect the market to do and a plan to invest accordingly (as well as a plan B in the event the market throws me a curveball).
But I don’t like wasting precious mental energy on something that I can’t control. I’d rather use that same energy identifying durable trends and then finding the best stocks to ride those trends.
To paraphrase one of John Maynard Keynes’s more quotable lines, I’d rather be generally right than precisely wrong.
All of that said…
I take a few forecasters’ work to heart. I don’t expect them to be right 100% of the time. But I like the analytical rigor they bring to the process because it makes me think about my own assumptions.
Grantham’s 7-Year Market Forecast
One of my favorites comes from legendary value investor Jeremy Grantham. His firm GMO updates a 7-year market forecast for assorted stock and bond sectors every quarter.
Grantham doesn’t try to play the loser’s game of market timing. Instead, he calculates what future returns are implied by current valuations. (i.e., what would returns be over the next seven years if current trends reverted to their longer-term averages.)
Let’s take a look at what Grantham and crew see ahead.
Source: GMO.
Well, it’s not pretty.
Grantham sees U.S. large-cap stocks losing 8% per year over the next seven years, meaning they’ll lose well over half their value from here.
But falling stock prices mean rising bond prices, right? So, perhaps a diversified portfolio of stocks and bonds will do just fine?
Not so fast. Grantham sees U.S. bonds losing 3.1% per year. And it’s not just a matter of inflation picking up steam, as he sees inflation-adjusted bonds losing a comparable amount.
There’s at least a little good news here. GMO sees emerging-market value stocks making at least a little money at 3.3% per year. But that’s about it. These grisly veterans see losses in literally every other major asset class.
The Takeaway
Grantham isn’t God. He’s just a mortal investor like the rest of us. There is no guarantee that his numbers here will be accurate.
But let’s just say it doesn’t pay to bet against him. His analysis is spot on a lot of the time.
By almost all objective criteria, the stock and bond markets look expensive today. If history is a guide, expensive markets don’t stay expensive forever. Something always knocks them back down to size.
It’s a little different this time. The Federal Reserve is printing an unprecedented amount of new money, and a lot of that fresh liquidity is sloshing into the capital markets.
Of course, it’s always “different this time,” and yet it never really is. We’re in a bubble, and these always end the same way.
But this isn’t something we need to worry about.
I expect the next 7-10 years to be a disaster for buy-and-hold strategies. But active investors can make plenty of money if they are willing to take a little more control over their trading.
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To safe profits,
Charles Sizemore
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
