Prospects For U.S. Stocks Grim

Includes: SPY
by: Roger Nusbaum

The latest thing whipping around the web is research that concludes domestic equity returns are going to stink for many years to come for what amounts to demographic reasons. I first became aware of demographics' potential to move stocks a little over 20 years ago when I worked at Lehman Brothers. Back then it was put to us as a positive; wealth transference from Boomers' parents to the Boomers going into stocks and then at some point along the way it spun around to concern for what will happen when the Boomers take their money out when they presumably retire.

While I believe in demographic trends this type of look forward for US markets also needs to take in the fundamental picture too. The fundamentals are well worn ground so I'll just say there is a lack of visibility of what will help turn things around other than time, which is not much to build an investment thesis on. This whole idea will be familiar to long-time readers in terms of prospects for US markets being relatively unattractive. I've probably underestimated the magnitude of the consequence of this but we have been heavy in foreign equities since before this site started. Quite frankly I think this type of general outcome has been quite obvious for many years and I think it is still quite obvious looking forward. There will of course be big up years along the way but over some reasonable period of time, like maybe five years, the returns will smooth out to a lower average--this has been going on and I am saying I believe it will continue. This belief has been a big reason for why I have sought out exposure to foreign and to themes for client portfolios. A long running idea here has been that "normal" returns were available in many countries during the previous decade and they will be available in this decade if the conclusions linked to above about the US turn out to be correct. To the extent there is comfort in crowds, much of the industry has been slow to adopt these views for US prospects and where to go to get "normal" returns. Being wrong about this sort of thing is referred to as career risk but even if the 9% per year linear return is a thing of the past (it never really existed) you can spend the time and take the risk thus giving yourself (or your clients) a better chance at some desired average return. I do not mean to imply this is easy but it is not rocket science either. Time spent, even if just focusing on what to avoid, will hopefully help some people.