Summary: Second Quarter 2018
Over the last 50 years the S&P 500 has compounded at an annualized rate of return of just over 10% and the average yield for a 10-Year U.S. Treasury has been roughly 6.4%. When we talk with clients, particularly those that experienced much of that time period, we find that those experiences and figures still drive their current return expectations. There is obviously a reasonable foundation for that, but we’d caution investors that the next decade may not look like the last half century.
Current valuations simply point to that and price always matters. As we’ve noted throughout our quarterly update, bond yields have improved, but at just under 3% the 10 Year U.S. Treasury is not even half of that 6.4% figure. For better or for worse, the yield an investor buys a bond at should be their expected return. There is no denying that yields in bonds, regardless of credit or maturity, are lower today than they have historically been.
Equity return expectations have many more moving parts than bonds, but we believe expectations need to adjust there, as well, for the same reason – current valuations. Strong global growth, tax reforms, and low interest rates all provide a solid backdrop for earnings growth and equities, but valuations remain stretched. As we illustrated in our Market Outlook section, equity risk premiums are still positive, indicating that equities over the next market cycle should generate positive returns and outperformance relative to bonds. Those returns may simply fall short of the 10% historical return figure of the last 50 years. Fortunately, international and emerging markets are priced to return something closer to their historical norms providing some opportunity to increase portfolio returns.
Markets and portfolios have experienced solid results over the last 7+ years and while we expect positive results over the next 7+ years we believe some caution and lowering of expectations is prudent.
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Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.