Looking at L-O-N-G term averages has a way of aligning volatile data into useful information. We found the table to the right to be a good exercise in comparing the past 5 years to the last 20 years. (For a bit of reference, 10 years ago we were in the eye of the storm both from a market meltdown and economic standpoint, and 20 years ago the tech bubble was heating up).

Looking at the LONG TermWhat is instructive is the large difference in the US Equity Market figures vs. the US Economic figures over time.

The economic related averages (last five rows) are remarkably in-line on both a 5-year and 20-year basis, which speaks to the muted recovery that has occurred and to the plodding strength of our economy. (Translation: What is happening on Main Street). The market related averages are fascinating in both the wide divergences over 5-year vs. 20-year averages, but also the wide differences in return (and risk) for various markets (domestic vs. developed international).

Takeaways

  • It is prudent to reduce your L-O-N-G term (the next 10-20 years) equity return assumptions toward 6-7%.
  • It is far better to plan for that type of return, and hope to exceed it, rather than to expect a much higher return which could result in a negative surprise.
  • It is realistic to anticipate that your L-O-N-G term bond return assumptions to be similar to the past 20-year averages.
  • We expect the gulf between US government yields and German government yields to persist for a while, as the US continues to lead the pack for interest rate increases while Europe is still intervening to hold back rates. (Translation= US 10-year bond yields should stay anchored a bit lower than they otherwise would be).
  • Oil prices tend to trend toward the long-term average over time, but have shown violent moves at various points in time due to supply-chain and geopolitical factors. (Side note: The US is not yet 100% petroleum independent due to heavy consumption by the transportation sector).
  • Do not confuse market performance over- or under-shoots to the underlying performance of the economy. Sometimes the two pieces rhyme, but the “market pendulum” has a tendency to swing too far in either direction (due to the fear and greed factor). A concept called “reversion to the mean” has shown that underlying economics and market performance will overlap over the L-O-N-G term, despite the short-term noise.

Step One

Step Two

Partnering with our clients to grow and preserve their wealth through clear, sound, and trusted investment counsel.