In clear contrast to a pure nowcasting perspective, our own forecasts paint a relatively sober view of expected returns going forward, particularly relative to the most recent history. The Research Affiliates AAI forecasts, based on an empirically driven quantitative model, do not highlight any asset class with a current annualized real expected return in excess of 10% over the coming decade. Emerging market equities are at the high end of expectations, sporting an annualized 6.8% real return throughout the 2020s.
At the other extreme, long-dated US Treasuries are expected to disappoint the most, with an annualized expected real return of −1.3%. Of course, our forecasts allow for the uncertainty inherent in capital markets; this uncertainty is reflected in AAI’s confidence intervals. Capital markets may surprise to the upside or to the downside, but as a base line we encourage investors to contemplate that the returns of the last decade are very unlikely to repeat and therefore to position themselves for more muted returns in the decade ahead. We wish we could be more exuberant, but that would be a disservice to all if we ignored the facts.
That being said, it’s not all bad out there from a forecasting perspective, particularly for those with reasonably honed “Sharpie skills.” For instance, we consider the December 17, 2019, article “A Decade of U.S. Market Exceptionalism Probably Won’t Repeat” by the Wall Street Journal’s James Mackintosh a directionally well-thought-out forecast, which when coupled with our expected returns aligns narrative with quantitative expectations.
The next day, also in the Wall Street Journal, Gunjan Banerji’s article “Options Traders Eye Insurance Even as Stocks Soar” discusses the behavioral biases that arise from relying on near-term history. Namely, because equities sold off so dramatically in the fourth quarter of 2018, many investors were reportedly expecting a replay of this scenario in the last weeks of 2019 and are piling into put options for protection. The article quotes an equity and derivatives strategist as saying, “People still are traumatized by this time last year.” This is not quite nowcasting, given the all-time highs being recorded, but basing a forecast on “being traumatized” by past market behavior is not an informed forecasting technique. These two examples of forecasts are juxtaposed by the same publication in a thoughtful manner.
As we jump into the 2020s, here is a bit of fun for those who wish to join us. As you read articles in the financial press, we invite you to ask a few questions: Is this purely reporting factual news or does it tacitly introduce a forecast, particularly from market participants quoted in the article? If there is a forecast, is it merely extrapolating what has already happened? Is it therefore a likely nowcast? Try it! It’s fun! Here is a brief (and necessarily incomplete) starter set of articles that we have recently enjoyed reading from this vantage point. If you are so inclined, send your assessment (news, forecast, nowcast) to us at email@example.com. We’d love to hear from you. And allow us to wish you the best of luck in life and in investments, now that we’re officially off and running in a new decade!