While some are proposing that we’ll see a “new normal” in stock returns going forward, economist Richard DeKaser says investors can expect 8% to 9% annualized returns over the next decade — meaning that it’s a mistake to avoid equities.
In a column for Kiplinger’s, DeKaser acknowledges that the past decade has been rough on investors, and that many are now fearful of getting into a market that is up some 70% off its lows. But, he says, investing based on the recent past “is like driving a car while focused on the rearview mirror: stupid and dangerous.”
DeKaser bases his projections on several factors:
Profit growth: He notes that corporate profit growth tends to mirror gross domestic product growth over the long haul. In the post-World War II era, corporate profit growth has averaged 7.9%, while GDP has averaged 8%. Over the past decade, both figures are about 4.3%. DeKaser says 5% growth over the next decade — real growth of 2.75% and inflation of 2.25% — is reasonable to expect.
Dividends: Over the past 50 years, the S&P 500 has averaged a 3.1% yield, with the low being 1.1%. DeKaser uses a figure in the middle — 2%.
Valuations: Using forward 12-month earnings, DeKaser says the price/earnings ratio for the S&P 500 is about 15. Based on historical averages, he thinks that figure will trend toward 18 or so, which would push returns for the coming decade to 8% to 9% annualized (5% profit growth, 2% dividend yield, and another 1%-2% in valuation expansion).