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The markets will have something low over the next decade



Business and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the close of October 2, 2019 in New York City.

Drew Angerer | Getty Images

The Dow Jones Industrial Average jumped to a record Monday, bringing the year-on-year gain to nearly 18%. But Morgan Stanley has a message for investors: don't expect anything near this return for the next 10 years.

The next decade could be a bleak one for stocks and bonds according to Morgan Stanley, who analyzed what current asset valuations for asset classes mean for future returns historically.

The traditional investor portfolio ̵

1; consisting of 60% shares and 40% bonds – will return only 4.1% over the next 10 years, Andrew Sheets, head of strategy across assets at Morgan Stanley, calculated. This will be close to the 60-40 portfolio's lowest rolling 10-year periods in the last 20 years. It would also be rare to look further back with an expected return that this low only observed on 4% of rolling 10-year periods back to 1950.

Why so low? Such a weak portfolio return is likely after a decade of massive multiple expansion for equities and a flood of money into bonds as central banks facilitate monetary policy to revive economic growth. These measures have led to the second-longest bull market for stocks on record. The beef market is now more than 10 years old. During that time, the S&P 500 has returned more than 13.8% annually to investors. In the future, however, it may be difficult to achieve strong returns as valuations are close to historical highs.

Valuation is an accurate advocate

Valuation proves "far more accurate than any other variable when it comes to determining what an investor's 5- or 10-year experience will be," Sheets said. "And at the moment, that experience looks challenging."

The S&P 500's subsequent price / earnings ratio, Wall Street & # 39; s preferred valuation metric, has grown to 19.6 from 16.9 in this decade. The relationship has also remained close to 20 in recent years, a level that market experts see as elevated.

Bonds have also been on fire since 2010. The benchmark portfolio for 10-year government bonds has fallen from about 3.8% in early 2010 to about 1.77% raising prices on its side. IShares 20+ year Treasury Bond ETF (TLT), which tracks the results of long-term Treasurys, has a return of more than 100% at that time. TLT increased by 14% this year.

These high valuations are partly a by-product of central bank measures to boost economic growth after the financial crisis. The Federal Reserve cut interest rates to zero and launched three asset purchase programs (quantitative easing) after the crisis. Other central banks, including the European Central Bank and the Bank of Japan, also used simulation tools to strengthen the economy.

Bailed out again?

Sheets acknowledged that investors could once again be "bailed out" from low central bank returns in the next decade, but noted that "these higher rates are simply to pull ever-increasing returns to date. It's great for today's asset owners, especially those close to retirement. It's much less good for anyone trying to save, invest or steer well into the future. "

For investors looking for investments with more positive prospects over the next decade, Sheets proposed British equities and emerging market debt in hard currency. UK stocks "trade at a historically large discount to global markets" and show "little sign of earnings or margin extension versus history." On emerging market debt, Sheets notes that it provides similar long-term returns to other similar assets "with similar volatility."

– CNBC's Michael Bloom contributed to this report. [19659002] Subscribe to CNBC on YouTube.


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