Lost Decade Ahead?
By James Parkyn - PWL Capital - Montreal
Stay the course with a diversified portfolio and long-term mindset
Are we headed for a lost decade in equities? It’s a question on many lips after the stock market’s incredible multiyear bull run.
The worries got amplified in October when Goldman Sachs issued a grim report predicting a meager 3% annualized return for U.S. stocks over the next 10 years (or only 1% after inflation).
The report noted that the S&P 500 Index has boasted a 13% annualized return during the past decade. But high valuations and extreme market concentration—both near 100-year highs—will make it hard for stocks to repeat the same gains through 2034, the report said.
S&P 500 likely to trail bonds: Goldman Sachs
“It is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time,” Goldman Sachs said. “The same issue plagues a highly concentrated index.”
The investment bank said the S&P 500 has a 72% probability of trailing bonds and a 33% chance of lagging inflation during the next decade.
The report prompted nervous news headlines. “Goldman Sachs Is Forecasting a Dead Decade for the S&P 500. Should You Sell Your Stocks?” one investing site pondered. “For a generation of investors accustomed to boom times, the new paradigm being contemplated would be harsh and unfamiliar,” The Globe and Mail said.
Lost decades predicted before
But as The Globe went on to note, analysts have been warning of a “lost decade” since the start of the current equity bull market.
“We may be looking at a lost decade,” financial historian Niall Ferguson said in 2009. The S&P 500 went on to gain 16.6% a year in the decade that followed.
In 2013, economist John Hussman said “dismal investment returns” were so certain during the ensuing decade that they were “largely baked-in-the-cake.” In fact, annual S&P 500 returns averaged 11.8%.
Booms often end in busts
Giving heed to bearish fears can lead to serious portfolio underperformance. But does that mean we should ignore Goldman Sachs’ predictions altogether?
There’s no doubt equity returns have been above average. Historically, above-average performance is often followed by periods of more modest returns or even losses. A decade of 1% real returns is improbable, but it’s not impossible.
The Roaring Twenties were followed by the dismal 1930s. The great 1942-1965 market run ended with 15 years of doldrums in which the S&P 500 saw -1% real annualized returns from 1966 to 1981. After the remarkable 1982-1999 bull we had the misery of 2000-2008.
Market turns can’t be predicted
Does this mean it’s time to pull out of stocks and hide under a rock? No one knows what the market will do. Even experts like Ferguson and Hussman get it wrong. Stocks could continue to soar. Or they could sell off or move sideways. Trying to time markets isn’t investing; it’s called gambling.
If we can’t predict the market’s turns, what can we do? At PWL, we’ve studied the data and determined that the best response is to diversify, maintain a disciplined long-term investor mindset and leave the forecasts to the horoscope pages.
Stick to the plan
Diversification also plays another role. It accounts for the fact that most wealth creation in equities comes from a tiny number of companies. Just 4% of stocks accounted for all U.S. stock market wealth creation from 1926 to 2023 above a risk-free investment in Treasuries, according to a recent study.
We can’t know which companies will be the future 4-percenters. But we can be sure to own them by buying broad index funds that hold all the companies in various markets.
No bull market lasts forever. But a long-term mindset and an investment strategy suited to your objectives and risk tolerance can give you the confidence to ignore daily market noise and not worry about whose prediction is right.
Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.