After big 2019, Wall Street warns slower road ahead
— After a year of nirvana, investors may need to get ready for something a little more normal.
Markets are coming off a fabulous 2019, where stocks and bonds around the world climbed in concert. But for the next year — and decade, in fact — Wall Street is telling investors to set their expectations considerably lower.
It’s not calling for another crash like the U.S. stock market suffered just over a decade ago. Or for another run like the last 10 years, where the S&P 500 returned more than 13% on an annualized basis. A gain less than half of that may be more likely, both for next year and annually for the coming decade.
“People need to have a more realistic expectation of what returns are going to be,” said Greg Davis, chief investment officer at Vanguard. “That means investors who are saving for retirement or for college education will likely need to set aside more, because returns won’t be as generous as what we’ve seen over the last decade.”
It’s not because Wall Street sees the U.S. economy falling into a recession, even though that’s been a recurring fear for much of the last decade. Much of Wall Street expects the economy to chug modestly higher next year.
Instead, it’s a simple matter of math. Stocks and bonds don’t have as much room to rise after their stellar 2019, analysts say. Starting points matter, and investments began this year at a low point after recession worries pounded markets in December 2018. U.S. stocks will start 2020, meanwhile, close to their highest levels ever.
Wall Street has been busy trying to rein in expectations.
Vanguard forecasts U.S. stocks will return 3.5% to 5.5% annually over the coming decade. Even toward the top end of that range, it’s only half what the market has returned historically. Foreign stocks might offer a bit more, at roughly 7.5% annually, but U.S. bonds look set to offer only 2% or 3% annually over the next decade, Vanguard reports.
Of course, any prediction about where investments will end up is only a guess, no matter how educated. Many on Wall Street came into this year expecting only modest returns given all the worries about interest rates and a possible recession. Now, the S&P 500 is about to close out its second-best year of the last two decades.
But for bonds, the reasons for lower expected returns are easy to see. Bonds pay much less in interest than one or 10 years ago. The 10-year Treasury now has a yield of 1.92 %, versus 2.82% a year ago and 3.54 % a decade ago. For bonds to return more than their yields, rates will need to drop even lower.
Some banks along Wall Street have healthy expectations for stocks in 2020 — but few if any are calling for a repeat of 2019’s surge for the S&P 500. Bank of America Merrill Lynch sees the index ending 2020 at 3,300, which would be a 2.5% rise, for example. Goldman Sachs is more bullish, with a target of 3,400, but that would still be less than a quarter of this year’s gain.
Low interest rates should help keep this price-earnings valuation high, analysts say. So will a U.S.China trade conflict that’s hopefully no longer ramping higher, analysts say.