The Dow Jones Industrial Average ticked to a new record high Monday morning and the index is sitting on an 18% gain for the year, but Morgan Stanley says you should hold your applause.
“That’s great for today’s asset owners, especially those close to retirement. It is much less good for anyone trying to save, invest or manage well into the future.”
According to the multinational investment bank, you shouldn’t expect anywhere near those returns over the next decade.
Instead, the traditional investor portfolio of 60% stocks and 40% bonds should expect a meager 4.1% return over the next 10 years, Morgan Stanley cross-asset strategist Andrew Sheets said. A 4.1% return would be in line with the lowest rolling 10-year period over the last two decades and looking back to 1950, this has occurred during just 4% of the rolling 10-year periods, according to CNBC.
The reason for the low prediction has a lot to do with the current record bull market run — in that it has to end at some point. The bull market is now more than a decade old and the S&P 500 has returned nearly 14% annually. However, with sky-high valuations, that means strong returns will be that much more difficult to come by moving forward.
According to Sheets, valuation is “far more accurate than any other variable in determining what the five- or 10-year experience of an investor will be.”
The S&P 500’s trailing price-to-earnings ratio has grown from 16.9 to 19.6 this decade, a 16% increase. The ratio also has been close to 20 the past couple of years, which experts say is elevated.
Bonds also have made big returns since 2010 and the yield on the 10-year Treasury has dipped from 3.8% in 2010 to about 1.77%.
Such valuations are mostly due to the Federal Reserve’s moves to get the economy going following the Great Recession. The Fed kept interest rates at or near zero and launched three rounds of quantitative easing following the crisis, while central banks in Europe and Japan have had negative rates.
Sheets also told CNBC that investors could once again be “bailed out” by central banks, but said “these higher prices are simply pulling forward ever more future returns to the present. That’s great for today’s asset owners, especially those close to retirement. It is much less good for anyone trying to save, invest or manage well into the future.”
Sheets pointed to stocks in Britain and emerging market debt in hard currency as safe havens.
Stocks in the U.K. “trade at a historically large discount to global markets” and show “little sign of over-earning or margin extension versus history.”