FAs’ Recent Long-Term Market Predictions Are Insane
Let’s hope financial advisors don’t take their own predictions seriously, C. Thomas Howard writes in Advisor Perspectives. If they do, their clients could be in trouble.
Riffing on another Advisor Perspectives piece that summarizes 500 FAs’ long-term asset-class forecasts, Howard notes that this large sampling expects large U.S. stocks to average 5% over the next 10 years, with less than 5% of advisors seeing the 10-year return to be equal to or greater than 10% — and 10% before inflation is the long-term average.
In fact, Howard, an emeritus professor of finance at the University of Denver, tells us that in the 67 years between 1950 and 2017 the U.S. stock market has experienced only eight rolling 10-year periods in which returns averaged 5% or less. That’s 14% of the total. Of these ugly patches, four “were driven by the stagflation of the 1970s and four were prompted by the Bernanke-driven 2008 market crash,” Howard writes.
Meanwhile, 21 of the rolling 10-year periods — 36% of the total — averaged returns greater than 15%.
For the rest of the time, returns have come in at around 10%. And this rate holds up in history further back than 1950, enduring as the norm “whether we are primarily agrarian (early to mid-1800s), industrial (late 1800s to mid-1900s), or service/information (mid 1900s to present),” writes Howard.
In other words, the dire outcome FAs predict for U.S. equities implies “horrific economic and market events” in the next 10 years, according to Howard.
And if they do see such things in the offing, Howard can’t imagine how. “The economy is booming, with strong growth as indicated by both purchasing manager indices at or above 60 and inflation remaining low,” he writes.
If inflation, however modest, is on the uptick, that’s “normal for a strengthening economy,” Howard writes. And if price-to-earnings ratios are on the high side, those rely on notoriously wobbly gauges. Pull P/E into focus on medium-term outcomes and stocks show “some but not worrisome overvaluation,” he adds.
“I am hard-pressed to come up with a narrative to support the pessimistic return outlook captured by the advisor survey,” Howard writes. So, unless advisors are talking about the unexpected adversities occuring well in advance, “there is little in the current environment that justifies anything other than a normal return forecast for the next 10 years.”
So why do advisors make such dour predictions? Howard thinks it’s because buyside economists and other prognosticators prefer to err on the side of pessimism, knowing that it garners more press and looks better in the long run than getting behind gains that don’t materialize. Howard says advisors take their cues from these opinion makers — and many ratchet their calls further downward for some of the same reasons.
All this only matters if advisors are aligning client portfolios with their bug-eyed predictions, says Howard.
If they don’t, well and good.
But if they do take themselves seriously “and construct retirement portfolios based on them, clients will be underinvested in stocks relative to bonds and long-horizon wealth will be destroyed,” Howard writes.