Crestmont Research is a firm dedicated to researching historical facts and data points critical to the understanding of financial markets. The principal behind this firm is Ed Easterling. I have followed his research for years and consider Crestmont Research indispensable to my money management efforts. So, you could imagine how sobering a moment it was for me to read the following in an April 2016 posting:
The long-term average return from the stock market is 10.1%. As Baby Boomers continue to retire, they will increasingly rely upon their investments and pensions for income. The youngest Boomers have about a decade to compound their savings into a retirement payload. Even younger Millennials have a vested interest in stock market returns for a secure retirement. So, from 2016, what length of time is needed to assure that you will receive the historical long-term average return of 10.1%?
NEVER-investors from today will never achieve the long-term average return. Not in ten years, twenty years, fifty years, or the nearly ninety years that represent the most recognized long-term average return.
This research piece goes on the state the critical assumptions behind this bold and sobering forecast. To simplify things as much as I can, let me paraphrase.
The only three valid components of stock market returns are:
- The change in the valuation level that investors will pay for current earnings of stocks.
- The growth or decline in earnings.
- The dividends being paid by stocks.
That’s it, folks. 90 years ago the price of the S&P 500 was 13 and the P/E 10 ratio was 11.7. As of March 31, 2016 the price of the S&P 500 was 2060 and the P/E 10 ratio was 25.8. What a run!
After a discussion of all three of these components and how they will or will not contribute to the future returns of the stock market, Ed Easterling states:
The discussion of the components for future returns is complete-all three parts indicate below average returns in the future. Earnings growth will be lower than average, unless the inflation rate increases. Dividend yields will be well below average as a result of current valuation levels. P/E cannot contribute its past benefit of expansion due to its currently high level.
First and foremost, one must realize that this analysis should eliminate any current expectation that investing in the U S stock market today will inevitably produce double digit long term rates of return.
So, what then should and investor do? That will be the discussion of next month’s posting.
Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Mike Jones is Managing Director / Investment Group of Argent Advisors, Inc. Write to either at 500 East Reynolds Drive, Ruston, LA 71270 or call (318) 251-5800. This newsletter is available via email on a free subscription basis. You can subscribe by clicking here. Direct any questions, comments or suggestions to Byron Moore at email@example.com or to Mike Jones at firstname.lastname@example.org.
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