10 Predictions for the Next 10 Years
Looking Out Long: Eyes on the Next Decade
Hindsight is 20/20, so the saying goes. But when it comes to their financial future, many investors would feel better served by some foresight, particularly on the heels of the worst economic and investing decade since the 1930s. Bob Doll, BlackRock's Chief Equity Strategist for Fundamental Equities, has been issuing his annual market predictions for nearly 20 years, but now is looking out even longer. Mr. Doll has ventured forward with some thoughts as to what the next decade might hold for investors.
"Many investors want to forget the last 10 years, which featured the two worst bear markets since the Great Depression," Mr. Doll says. The good news? "Two disastrous market decades in a row is extremely unlikely," according to the veteran investor. "That said, we're not likely to see double-digit stock returns in the coming 10 years either, given the ongoing deleveraging and significant structural problems that still exist in the economy."
On balance, Mr. Doll believes that, over the next 10 years, "Stock returns will be in positive territory, but investors will need to cope with a larger number of recessions than they have over the past 20 years, as the frequency of recessions returns to a more 'normal' level." In addition to assessing the potential future of the stock market and the economy, Mr. Doll also offers some food for thought on topics ranging from inflation and interest rates to geopolitics. Following is a complete summary of his 10 for 10 (10 predictions for the next 10 years):
1. US equities experience high single-digit percentage total returns after the worst decade since the 1930s.
Mr. Doll expects stocks to enjoy positive returns for the next decade, but not the lofty results achieved in the '80s and '90s. He is calling for average annual returns of approximately 8% for the next 10 years. If history is any indication, equities should be poised to perform well in the 10 years following the most recent "lost decade" (see chart below).
Good Has Often Followed the Bad
10-Year Periods of Poor S&P 500 Index Returns (Average Annual Total Returns)
Sources: Informa Investment Solutions; SBBI 2006 Yearbook. Past performance is no guarantee of future results. It is not possible to invest directly in an index. Performance is represented by SBBI's Large Company Stocks (1926 to 1956) and the S&P 500 Index (1957 to 2009), a market capitalization-weighted index that measures price movements of the common stock of 500 large US companies within leading industries. Investing involves risk, including the risk of loss of principal amount invested.
2. Recessions occur more frequently than once a decade as occurred in the last 20 years.
Over the past 20 years, the economy has entered recession once every 8 years, compared with once every 3.8 years over the past 100 years (see table below). Because the economy is still facing long-term structural problems, Mr. Doll expects future recession frequency to be closer to the long-term average.
Recessions Ready for a Reversion to the Mean?
|Number of |
|Average Frequency |
|Since 1910||20||every 3.8 years|
|Since 1990||3||every 8 years|
Source: Ned Davis Research.
3. Healthcare, information technology and energy alternatives are leading growth areas for the US.
Demographic trends, innovation and geopolitical developments will mean that the healthcare, information technology and energy alternatives sectors of the economy are likely to act as key drivers of growth in the coming years.
4. The US dollar continues to become less dominant as the decade progresses.
The greenback's prominence is likely to wane over the next decade as increasing US debt acts as a drag on the dollar's value. Still, Mr. Doll expects the dollar to remain the world's principal reserve currency.
5. Interest rates move irregularly higher in the developed world.
On the interest-rate front, global rates are likely to rise in symphony with inflation concerns, as Mr. Doll expects deflationary pressure to gradually give way to a more inflationary environment as the decade progresses.
6. Country self-interest leads to more trade and political conflicts.
As individual economies continue to struggle, politicians around the globe will likely respond with measures intended to protect domestic industries and employment, leading to trade and political conflict.
7. An aging and declining population gives Europe some of Japan's problems.
Europe may be particularly troubled, potentially faced with structural economic problems and demographic issues (declining birth rates and a shrinking labor force) similar to those that have plagued Japan since the 1990s.
8. World growth is led by emerging market consumers.
The global economic recovery that began in 2009 was led by emerging markets, and Mr. Doll expects their leadership to continue through the coming decade.
9. Emerging markets weighting in global indices rises significantly.
As emerging markets become even more significant to the global economy, they are also likely to become an increasingly large part of the global equity market.
10. China's economic and political ascent continues.
Now the world's second-largest economy, China could overtake the United States to become the largest by 2025, Mr. Doll believes. Despite structural problems (an aging population, the ongoing threat of political unrest and an economy still largely state-controlled and hampered by low levels of innovation), China's growing prominence on the world's economic and political stage is unlikely to be altered.
Back to Basics
Ultimately, with a fairly tumultuous decade now behind us, Mr. Doll believes the next 10 years will be characterized by a "reversion to the mean" in terms of economic growth and market performance. Against this backdrop, he advocates for a renewed focus on the basic tenets of investing.
"It's important that investors remain focused on their long-term goals, even when things get a little rocky, as they will from time to time," Mr. Doll says. "At BlackRock, we believe risk management is key, especially in uncertain environments. We also believe in the merits of diversification to maximize a portfolio's risk/reward, regular portfolio rebalancing and working with a financial professional who understands your goals and can help you to assess the risks and opportunities, no matter what the future brings."
Mr. Doll's 2011 outlook, "10 Predictions for 2011," will be available in January 2011.
Opportunities for Investors
Markets are notoriously unpredictable, but based on his long-term outlook, Mr. Doll offers these suggestions for investors:
Overweight stocks and other risk assets vs. Treasuries and cash: Even moderate equity returns in the high single digits would likely represent a number that other asset classes will struggle to achieve.
Favor US stocks over other developed market equities: Since the recovery began, US stocks have outperformed their international counterparts, and we expect this trend will continue for some time.
Dip into emerging markets: Investors can access emerging markets equities directly or through investment in large US multinational companies positioned to benefit from the growth in emerging economies. In general, such companies are innovative, have a record of effectively allocating capital, operate under stronger corporate governance standards and have a greater shareholder orientation than most companies in the developing world.
Choose sectors wisely: Mr. Doll sees tremendous long-term growth potential in the healthcare, information technology and energy sectors within the United States.