My concern is that today a lot of investors are taking near-term market returns and extrapolating them forward, assuming that this very strong equity market that we've had--really since 2009 with just a few interruptions here and there--will be persistent.
We have had great market returns over the past three and five years, something like 16% on an annualized basis over the past three years, and 14% over the past five years. But when you look at sober forecasters of market returns, what they are projecting, they are much less sanguine. I recently talked to Jack Bogle, for example, the founder of Vanguard. He was forecasting 10-year equity returns in the neighborhood of 4%, which is quite muted, even relative to his forecasts in the past. GMO are kind of a notable bear, but at mid-year they were forecasting a 7-year market forecast for equities in negative territory once you factor in inflation.
I think it's important to keep those in mind. Remember that although over long periods of time, the equity market has beaten other asset classes, you do need to be careful about the return projections that you bake into your own retirement-planning assumptions.
Jeremy Beckwith, director of manager research with Morningstar U.K., shares his views on U.S. equities.
Through 2015 the U.S. equity fund sector lost the momentum that had sustained its long bull move since March 2009. The S&P 500 gained over 200% in this period, but has since trading sideways and in August it broke the uptrends from both the 2009 and 2011 lows.
This fading price momentum was also accompanied by deteriorating breadth as fewer and fewer stocks made new highs as market leadership became concentrated in a few key technology and biotechnology names, and market volumes disappointed.
These internal market signals are very typical leading indicators of a developing market top, and the August breakdown below 2,080 was a market statement that the bull market since 2009 was complete and a bear market, or at best a long sideways correction, had begun.
In addition, the daily market action of the last two years suggested a market that was valuation-driven as long as quantitative easing was still on the table, rather than a market led by stronger corporate performance.
The market tended to rise on weak economic data, since it implied an easier monetary policy for longer, and tended to fall on strong economic data, implying a nearer, tighter monetary policy.
With the help of 3 indicators - the Shiller P/E ratio, dividend yields and Morningstar's fair value assessment, John Rekenthaler, vice president of research for Morningstar, attempts to answer the question: Are U.S. stocks overripe? Next.....
