The market doesn’t ignore math forever but it can certainly ignore math for a while.

With the market up and more capital (i.e. money) in the system than anybody knows what to do with, the investing environment is getting tougher.

After 12 years of the Fed pumping money into the stock market, it’s difficult to imagine or remember (depending on how old you are) a scenario where stocks don’t simply go up, or recover within weeks of a dip. Throw in some GameStop and Dogecoin and it seems like investing in stocks will always get us where we want to go.

 

But stocks are expensive by almost any measure, and bonds are not paying anything meaningful. Although expensive stocks can get more expensive, math tends to win over long periods of time.

 

A popular measure of the “expensiveness” of stocks is the Shiller P/E Ratio. There is little correlation between the Shiller P/E Ratio and 1- or 2-year returns, but there is a 90% correlation over 10 years. In other words, stock values can’t be used for timing, but they can be used to set long-term expectations.

 

I recently got ahold of a research report from BCA Research, which is a widely-respected research firm that has been around since 1964. Here are some highlights (warning: they aren’t rosy).

“Returns over the next decade will be very low compared to history. We project that a standard global portfolio (50% equities, 30% bonds, and 20% alternatives) will return only 2.9% a year in nominal terms. That compares to a historic return of 6.3%.”

 

“Some assets will produce better returns, most notably small caps (4.9%) and alternatives (6.2% for private equity, for example). But they also carry higher risk.”
“Returns over the coming decade are likely to be very disappointing compared to history.

 

A US-only portfolio…is likely to produce only a 2.8% return, compared to 7% in history.”
“The reason is simple: Valuations currently are stretched in almost every asset class. The risk-free rate in the US is 1.6% (compared to a 20-year average of 3.1%). It is negative in the euro area and zero in Japan.”

Here is a sample of forecasted returns from the report. The first number is the “Projected 10-15 Year Annualized Return” and the second number is the “Historic 20-Year Annualized Return”.

Investment Grade Bonds 2.0% / 5.7%
High-Yield Bonds 3.2% / 7.7%
Global Stocks 3.1% / 7.0%
U.S. Stocks 2.6% / 8.5%
U.S. Small Cap 4.9% / 9.9%
Emerging Markets 4.3% / 11.1%

U.S. Direct Real Estate 9.8% / 8.2%
U.S. REITs 7.7% / 9.7%
Private Equity 6.2% / 11.1%
Commodities -0.9% / -2.4%
Farmland 6.5% / 12.1%
Timberland 5.7% / 5.7%
Gold 3.8% / 10.0%

50/30/20 Portfolio (US) 2.8% / 7.0%
50/30/20 Portfolio (Global) 2.9% / 6.3%