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Is There a Change Coming in the Direction of the Markets’ Winds?

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AUTHOR: David Lancaster on 1/14/2025

I just read an interesting article by Christine Benz of Morningstar. Each year at this time she takes a look at major financial firms projections for future market returns.

Although I don’t pay any attention to year end individuals’ market prognostications this article did catch my eye. She found that these financial firms have reduced their return expectations for US stocks. Every firm in her survey is expecting higher returns from non-US stocks than domestic over the next 10 years, and some firms’ 10-year bond market forecasts are higher than their return expectations for US stocks.

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Norman Retzke
23 days ago

I’ve read articles about the value of boomer retirement accounts passed on to younger via estates. The “Great Wealth Transfer”. For example, “Baby boomers and the silent generation are expected to pass on $84.4 Trillion between now and 2045”. It is reasonable to assume that some of that won’t evaporate and will remain invested.

Norman Retzke
23 days ago

I’ve read often about the hazards of large and/or frequent portfolio changes. In a nutshell there is significant data that indicates that market timing doesn’t work. My last large portfolio overhaul was 2006. I rebalance annually and review occasionally. If my original thesis for purchasing a stock or ETF no longer holds, I’ll trim or sell. I have a portfolio of small, medium and large companies, 12% is foreign. Cash or equivalent to avoid selling in a down market. Morningstar X-ray tool states it is a core portfolio. A downturn might provide some buy opportunities.

Liz Brennon
24 days ago

I think one issue that gets over looked is demography. The boomers are a big population bubble and we tend to “break” things in every stage of life we move though due to no fault of our own, often coupled with the baby bust generation after us, etc.

Over half of the stock market is “owned” by funds in retirement accounts. The required minimum distributions will force withdrawals. There are not enough younger people, accounting for their stage in life and how much people contribute to retirement accounts in each stage to make up for the required withdrawals. This is going to mean that eventually the stock market will drop (supply and demand), followed in threeish years by the bond market. While some folks say 3rd world investors will make up the difference, so far, last I saw not one third world country on the list of the top 20 countries with investors in our stock market.

A related issue, that is going to increase, for some, spending retirement money rather than reinvest is is that when people sell their McMansions they are not going to get what they expect (except in a few housing areas). That is due to fewer people in the demographic groups who buy big houses (again supply and demand – the price of ranch and master on the first floor prices have been driven up faster than than any other “kind” of house – as both retirees and new home buyers are competing for the same homes). Not only that but the life span of many of the materials used to build those houses is about 50 years and so their repair needs will be higher. As a result those retirees will not get what they expected and will be more dependent upon what they take out of the market or their retirement accounts. That will also help drive the stock market down.

I rarely see discussions about the future include those variables/issues.

Ben Rodriguez
24 days ago
Reply to  Liz Brennon

Some counterpoints.

When you sell due to an RMD, you’re not forced to go to cash. Let’s say a retiree must take an RMD out of their Total Stock fund, if they don’t need the cash they can just buy the fund in their brokerage. That happens more than you’d think. Further, while there are not necessarily as many people to buy, the securities may still be bought in the same quantities. An heir of a retiree can hold the same Total Stock fund as his parents did.

Re: housing, I agree that it’s tempting to think that there will be a real estate bust, the population of the US is still growing, however not through natural growth, due to immigration. The world population will see a dip and I think it could be disastrous for humanity, but the US is the big beneficiary due to its desirability.

mytimetotravel
24 days ago
Reply to  Ben Rodriguez

Exactly. I have been taking RMDs for several years, and have yet to spend any of the proceeds. I simply move the money to similar funds in taxable. Despite the RMDs my IRAs have not yet declined in value.

parkslope
24 days ago
Reply to  Ben Rodriguez

I would add that the wealthiest 1% own 50% of US stocks and the top 10% own 93%. These folks also receive most of the dividend and interest income earned by Americans and are also much more likely to have other forms of non-stock income (e.g., real estate investments) which limits the need of retirees in this group to sell stocks to fund their retirement.

I’m sure that I am not the only retiree on HD whose equity holdings are greater than they were when they began taking RMDs. (I have been taking RMDs since 2018 and RDQ, who has been taking RMDs for a few years more than I have has indicated that his wealth has increased since he retired.)

Humble Reader
25 days ago

There is the well-accepted “mean reversion” which is the assumption that an asset’s price will tend to converge to the average price over time. And then there is what I will call “mean reversion with debt”, which is apparently the basis for the current prognosticator pessimism about future returns. Will investors be punished for the past several years of high returns? Or is it more likely that returns will simply move towards whatever long-term average is selected: (inflation-adjusted S&P500) 1951-2024 7.59%, 1995-2024 8.31%, 2020-2024 10.76%. I picked these 74, 30, and 5 year intervals since they are 1) my life time so far; 2) my maximum investment future if I am very, very lucky; 3) how long I can fund my life-style from fixed assets should a multi-year down market actually occur. I am in agreement with the comments about not making any changes.

Mark Bergman
25 days ago
Reply to  Humble Reader

Sam Ro posted a Substack yesterday 1/15/24 titled, “There is no evidence of mean reversion in equity valuations” based on Goldman Sachs analysts evaluation.

https://open.substack.com/pub/samro/p/goldman-no-evidence-equity-valuation-mean-reversion?r=tz2r&utm_medium=ios

Ben Rodriguez
25 days ago

Her article was eye opening. I fear that some of the next ten years’ returns were “pulled forward” from the last few years’ stunning returns. But I don’t know what to do about it and I likely won’t do anything.

Joe Cyax
25 days ago

Take a deep breath, and read this article (actually, DON’T read the article, JUST the HEADLINE):

Strategic Income Outlook: Magic 8-Ball Says, “Cannot Predict Now”

https://www.advisorperspectives.com/commentaries/2025/01/16/strategic-income-outlook-magic-8-ball-cannot-predict

mytimetotravel
26 days ago

If I am adequately diversified, why would I care?

Michael1
25 days ago

And it was a nice concise summary of a pretty long article. Thanks for posting.

S
S
26 days ago

Morningstar has been forecasting higher returns for non-US stocks for at least the past two years. Eventually they might be right.

Norman Retzke
27 days ago

It isn’t just U.S. stocks. Benz’ article states “some firms’ 10-year bond market forecasts are higher than their return expectations for US stocks.” Over the next decade Vanguard “expects 4.3%–5.3% annualized returns for both U.S. and global ex-U.S. currency-hedged bonds. ” U.S. core inflation is projected to be 2.5%. It can be surmised that higher U.S. Treasury Yields will also favor Money Market Funds. Such circumstances often favor funds outflows from stocks and that leads to falling prices. Or so the wisdom goes. Of note, tech stocks have become a bit of a stretch at current valuations and these stocks have fueled the recent boom. Some also say that AI will come to the rescue, but the evidence is inconclusive. In fact, some say stocks are in an AI induced euphoric bubble. As usual, predicting the future is fraught with risk.

Last edited 27 days ago by Norman Retzke
Ray Holland
26 days ago

Here’s the link to the article that you’re referring to. i’m not a premium subscriber and it’s available for public consumption:

https://www.morningstar.com/portfolios/experts-forecast-stock-bond-returns-2025-edition

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