Advisors and their clients should not expect much more than 5% to 6% annual returns on their portfolios — possibly even less — over the next 10 years, according to the chief investment strategists at Commonwealth Financial Network and Russell Investments.
The odds of a correction or bear market are also increasing, though neither strategist expects that for another year or two.
“The conditions for a bear market are not in place right now but you can see them coming,” said Brad McMillan, chief investment strategist at Commonwealth Financial Network, during his talk at last week’s FPA annual conference in Nashville, Tennessee. “What we have right now looks a lot like 1999.”
A few months after 1999 ended, the major U.S. stock market indexes peaked and declined almost steadily through a short-run recession during much of 2001 until September 2002. The Nasdaq didn’t recover those losses until April 2015; the S&P reached its previous peak in 2007.
“We don’t know what’s going to happen now, but we do know what happened in 1999,” said McMillan. “There’s a good chance there will be stormy weather ahead. Think about what a storm will mean for you and your clients.”
Erik Ristuben, chief investment strategist at Russell Investments, in his FPA presentation, said that advisors and investors should expect a year of investment losses within the next five years and a recession possibly as soon as 2019 but more likely in two years.
His reasons: The economic expansion and stock bull market are in their ninth year and stock valuations are extremely high. He titled his session: “The Low Return Imperative: Investing Uncomfortably.”
The Shiller cyclically adjusted P/E ratio, known as the CAPE, has topped 31 and the more traditional P/E is over 25 – both at their highest levels since 2009.
In order to stay as high as they are or move even higher, equity valuations require strong earnings growth, which requires strong economic growth, but GDP has been relatively slow, according to McMillan. (GDP growth for 2017 is forecast between 2% and 2.5%.)
In addition to high P/E ratios, McMillan is concerned about the price-to-sales ratio and margin debt-to market ratio — both either at or near record highs.
Given these expectations for low returns and potential losses, both McMillan and Ristuben suggest that advisors and their clients adjust financial plans and portfolios to minimize potential damage. Here are some of their recommendations:
Adjust Financial Plans
If clients need a certain amount of money for retirement or any other financial goal, their plans should assume 5% annual earnings rather than say, 7% or 8% or higher. They need to save more — and invest more — to make up the difference, and they may have to spend less to do that.
Manage Portfolio Risk