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What is the long term potential of US Stocks?

| January 17, 2017
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Recently, I was asked the following question, "what are my thoughts on the long term return potential of the US stock market?"  Here is my answer:

It’s a really good question.  I encourage you to read the linked 2016 Morningstar article below that outlines some long term stock market estimates from “experts” like Vanguard, Schwab, Morningstar and more.  I call them “experts” in quotes because even though I have tremendous respect for the knowledgeable, talented, experienced, and dedicated professionals that work for these organizations, they don’t know for sure what will happen over the next 10-15 years for stocks or bonds and neither do I.  These “expert” estimates are not guesses but instead quantifiable estimates based on facts, models, assumptions, and formulas.  Some of the “experts” predict huge declines in stocks or bonds, some predict above average growth, and most predict something in between.  Many of the “experts” will be wrong and perhaps, a few may even be right.
In my estimation, the consensus estimate from the article above is for moderate, below-average growth over the next 10 years in the 6-8% annual range.  Yet, the stock market has averaged about 10% annually over a very long term period of time going back to the 1870’s.  Over that long term period, there have been wars, recessions, shocking news events, good and bad Presidential administrations, government debt, Fed interventions, policy mistakes, booms, busts, and the list goes on.  Despite all of these challenges, we have still seen a long term historical average for stocks around 10% and bonds around 5%.  In my opinion, the next 10-15 years will likely present challenges such as recessions, shocking news events, good and bad Presidential administrations, government debt, Fed interventions, policy mistakes, booms, and busts.
Interestingly, over the last 10 years ended 12/30/2016 the S&P 500 has grown just 4.78% average annual return.  This is well below average.
During the 15 years ended 12/30/16, the S&P 500 has returned 4.70% on average. Again, we are well below average for the last 15 year period.
So our long term historical return figures are well below the long term average rate of return of 10-11% and this is a fact.  In fact, there are some that believe that we are still in a secular (meaning long term) bear market that began in 1999-2000.  Secular bear markets can last for periods of 10 to 20 years or even longer.  In my opinion we are still working through this long term, secular bear market.  Maybe it’s behind us already, maybe it ended in 2009, but if you look at the 6-7% consensus estimate over the coming decade, that might argue we are still in a long term, secular bear market of below average returns.
In my humble opinion, I am leaning just a little more optimistic over the next 10-15 years.  The reason is that with just 4.7% average annual return over the last 15 years, we have a lot of catching up to do to reach a long term average of 10%. Maybe we will never see a long term average of 10% ever again and our financial world has forever shifted from the last 150 years.  I think in 2017, anything can happen.  It is normal to have corrections of 10%, 15%, and 20% during a typical year.  But I am optimistic over the coming decade simply because we have been through a pretty tough time over the last 15 years and we have some catching up to do to get back to the mean.
Of course…
Past performance is no guarantee of future results

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Past performance is not an indication or guarantee of future results

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