Does the past predict the future? If you work in the regulated financial industry, you can only answer that question two ways:

  • No
  • Not necessarily

When I used to write commodity and hedge fund marketing materials, I typed the official phrase, “Past results are not necessarily indicative of future results” so often, I finally gave it a hotkey on my computer.

That’s not to say the past is irrelevant. It can tell us a lot.

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If you can identify a pattern in economic cycles or market activity and have enough observations to make it statistically significant, it raises your odds of success.

The fact that most people do this badly doesn’t mean it can’t be done at all. Talent exists; it’s just hard to find.

Today, I’ll tell you about one of the speakers from John Mauldin’s Strategic Investment Conference and what I learned from him.

Slow Growth Ahead

That speaker is Martin Barnes who edited the very expensive Bank Credit Analyst for many years.

BCA doesn’t always catch short-term moves, but its long-range macro outlook has been reliable. I was thrilled to to hear him speak at the SIC this year.

Martin believes the current slow economic expansion will continue. He showed this slide comparing the length and magnitude of past US growth cycles.

Real Returns

The bottom yellow line represents the current recovery, which has produced less GDP growth than prior cycles. But in terms of length, it is now tied for third place, surpassed only by the 1961–1969 and 1991–2000 expansions.

If it lasts two more years, it will be the longest on record.

Martin thinks it could happen: “Expansions are typically assassinated. They don’t die of old age,” he said. In most cases, the assassin is monetary policy.

The good news this time is that Martin doesn’t see the kind of imbalances that would make the Fed go overboard. With inflation relatively subdued, he thinks the tightening won’t be too tough.

He also noted that President Trump’s tax cuts and stimulus spending plans would have overheated the economy and probably led to a 2019 recession. With gridlock winning, he sees this as a minor risk.

The bigger problem is that other macro trends aren’t helping.

Worker productivity and the working-age population are problematic already, and they will likely get worse.

Real Returns

This being the case, Martin thinks we can’t expect the kind of investment results seen in prior expansions.

A Decade of 2% Returns

Over long periods, stock market growth has to track economic growth. Market gains since 2009 reflect good news that hasn’t actually happened yet. Which brings us to the bad news I mentioned.

Martin thinks the 2% average real GDP growth of this expansion will likely continue for the next decade—and in the long run, stock benchmarks can’t grow more than the economy in which they operate.

That means net investment returns will stay around 2% as well.

Here’s what BCA expects, broken down by asset classes:

Real Returns

From 1982 to 2016, a static stock/bond portfolio delivered real (after inflation) returns around 7%. US equities alone averaged 11.2%.

Consider those the “good old times,” though, because Martin Barnes doesn’t expect any more of it.

This is a big problem for investors who are planning their retirement on the assumption that they will earn inflation-adjusted returns well above 2% and are saving and investing accordingly.

Worse, many public pension funds still assume their portfolios will earn 7–8% nominal returns and make promises to workers based on that assumption.

If Martin is right, this is not going to end well for either workers or taxpayers.

What can you do?

Hope for the Best, Prepare for the Worst

First, you shouldn’t assume 7% real returns will continue. Maybe Martin is wrong and the market will zoom higher in the next decade—but your retirement plan shouldn’t bet on it.

Keep your expectations conservative. Better to be surprised by a windfall than a shortfall.

Finally, reconsider your investment strategy.

You’ll notice in the BCA forecast that they expect the highest future returns to come from emerging-market (EM) equities. I agree—a reduced-volatility emerging market is up almost 3% so far, but still has plenty of room to grow.

What you absolutely shouldn’t do is assume the future will look like the past. But while you can’t predict the future, you can still control your response to it. Make sure your strategy won’t disappoint you.

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