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What Do I Believe The S&P 500 (SPY) Returns Will Be In The Future?

|Includes:SPDR S&P 500 Trust ETF (SPY)

Ok, here it is: I believe that the Standard & Poors 500 Index will deliver total returns on average of about 13% per annum for the next ten years. This would be an educated wild guess, but the 13% would allow for an estimated 8% for a market risk premium (part of your return on the stock market to allow for the risk of the overall market) and a risk-free component, estimated at about 5%. The risk-free component could break down to allow for about 3% projected inflation, plus approximately 2% to allow for real growth in the economy.

I base these estimates on relatively strong returns on the S&P 500 Index over the last five years, with the realization that the US carries a historically large National Debt. It doesn't take a rocket scientist to consider at least modest inflation in overall price levels to be a likely scenario.

I look at the next twelve months as essentially three scenarios, with the following probabilities. I think there's about a 30% chance that the S&P 500 Index will deliver a total return of at least 25% in the next twelve months, a 50% chance of a return of at least 10% and a chance of 20% of a total loss at least as bad as negative 25%. These are wild guesses that sum up to an expected estimate of 7.5% for the next twelve months for the S&P 500 Index.

It goes like this: If the US faces an unexpected military obligation in the Middle East, then I believe the S&P 500 Index (the market) would likely go down. I think most likely, however, the market should generate my estimate of about a 10% total return, or about the same as it has done per year for the last 75 years. If we find that we are generally relieved of worries about Syria, I could see the economy begin to gather more steam, and a vibrant economy could perhaps spur the market to advance another estimated 25% or so.

Disclosure: I am long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I am long SPY.

Stocks: SPY