NEW YORK (AP) – After a year of nirvana, investors need to get ready for something a little more normal, market watchers say.
Share markets are coming off a fabulous 2019, where stocks around the world climbed in concert. But for the next year – and decade, in fact – Wall Street traders are telling investors to set their expectations considerably lower.
“People need to have a more realistic expectation of what returns are going to be,” says Greg Davis, chief investment officer at Vanguard. “That means those saving for retirement will likely need to set aside more, because returns won’t be as generous as what we’ve seen over the past decade.”
Lower forecast targets for U.S. stock benchmarks are not because Wall Street sees the economy falling into a recession, even though that’s been a recurring fear for much of the past decade. Much of Wall Street expects the economy to chug modestly higher next year.
Instead, it’s a simple matter of math. Stocks don’t have much room to go up after their stellar 2019 performance, analysts say.
Starting points matter. Investments began last year at a low point after recession worries pounded markets in late 2018. However, U.S. stocks will start 2020 at close to historic highs.
Those saving for retirement will likely need to set aside more, because returns won’t be as generous as what we’ve seen over the past decade
Wall Street has been busy trying to rein in expectations. Vanguard forecasts U.S. stocks will return between 3.5 per cent and 5.5 per cent annually over the next decade.
Some major banks have relatively healthy expectations for stocks in 2020 but few, if any, are calling for a repeat of 2019’s surge for the S&P 500, which was at 28.9 per cent as of Tuesday’s close.
Bank of America Merrill Lynch sees the index ending 2020 at 3300, which would be a 2.2 per cent rise. Goldman Sachs is more bullish, with a target of 3400 – still less than a fifth of last year’s gain.
Stocks are much more expensive than a year ago on a host of different measures. One of the most commonly used is how a stock’s price compares to its profit over the preceding year. By that measure, the S&P 500 is trading at 21.1 times its earnings – up from 16.5 at the start of last year and way above its average over the past two decades of 17.7, according to FactSet.
However, low interest rates should help keep this price-earnings valuation high, analysts say.
Even if the worst-case scenario were to come to pass and the U.S. economy were to fall into a recession, many investors say they are not worried about a repeat of the crash of 2007-09, where some stock investors lost more than half their savings.
Investors have remained hesitant to plow their money into stocks, even after this decade-long run, so fund managers say they don’t see grossly overvalued markets, as there were a decade ago.
– Associated Press
Source: Thanks smh.com