The S&P has returned more than 10 percent since the election of President Trump on November 8, adding some momentum to a bull market that is already eight years old. There's no doubt that investors are feeling optimistic, but many investment professionals are talking about lower long-term expectations. That's not a judgment of President Trump's economic policies. Rather than that, it's about equity valuations and fundamentals. So, where do we go from here?
Since the current bull market began in 2009, stocks are up a whopping 17 percent per year, 70% more than the long-term average of about 10 percent per year. But Bloomberg reports that the average price-earnings ratio for stocks in the S&P 500 is 18.3, based on consensus estimates of 2017 earnings. That's near the high end of the historical track record. Fran Kinniry of Vanguard believes that valuation explains about 40 percent of returns; the other 60 percent is unexplained. Therefore, Vanguard prefers to think of probable ranges of outcomes. Kinniry says there is about a 25 percent chance that stocks will deliver double-digit returns over the next decade. There is the same chance of an average return of 3 percent or less, and a 50 percent or so chance for stocks to average somewhere in between.
This chart, from Ned Davis Research, indicates that when investors are pretty fully invested in stocks (like now), the returns looking out 10 years are generally low. Likewise, when investors have largely avoided stocks, 10 year-returns have been very good on average.
Bottom line: At current levels, stocks are not priced to deliver big long-term returns, but they might stay high for awhile. Stacey Wall serves as Chief Executive Officer at Pinnacle Trust. You can reach Stacey by emailing him at [email protected] or by calling the office at 601-957-0323.