Recently, Chief Cross-Asset Strategist Andrew Sheets of Morgan Stanley recorded two podcasts discussing the expected market returns over the next decade.
Morgan Stanley estimates that the expected return of a 60:40 stock-to-bond portfolio will be less than 4% per year over the next 10 years, in both the U.S. and European markets.
This estimated return is close to the worst estimated return over the past 20 years and is reminiscent of the returns of the 1950’s.
However, this estimate could be positively affected by any future central bank easing of monetary policy similar to what has occurred since the financial crisis in 2009. However, relaxing monetary policy also increases inflation, which reduces real returns in the long run.
Currently, the bond portion of the portfolio is hindered by low-yielding, investment-quality government bonds as the U.S. 10-year bond yields only 1.9% and the German 10-year bond returns a negative 0.3%.
What will stocks return?
Over the past 10 years, the S&P 500 has returned over 11% per year. The average annual return of the S&P 500 since 1970 (October) through 2019 (October) is almost 8% (7.66%).
However, with the various North American stock markets at recent highs and Price-to-Earnings ratios above trend, there are concerns that the indices will retrench lower as the P/E ratio reverts to its long-term mean, which mean lower equity returns over the next 10 years.
Morgan Stanley estimates that the equity portion of the 60:40 portfolio could return only 5% per year over the next 10 years. Total portfolio return per year: 60% stocks at 5% and 40% bonds at 2% equals 3.8%.
Below are the links to the podcast:
November 1 Podcast: The Cost of Easy Policy: A 10 Year Outlook
November 8 Podcast: A Tough Road Ahead for the 60/40 Portfolio?
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