As a follow-up to Vanguard founder Jack Bogle’s 2015 stock market prediction paper and related Morningstar article, here are a few selected slides from the presentation deck by Jack Bogle at the Bogleheads XIV conference in October 2015.
The formula for predicting future stock market returns is:
Future stock returns = Current dividend yield + Predicted earnings growth ± (Reversion to long-term average P/E ratio)
The formula for predicting future bond market returns is:
Future bond returns = Current yield to maturity
At 6% nominal for stocks and 3% nominal for bonds, both 10-year numbers are below long-term averages. However, the 10-year breakeven inflation rate based on TIPS and Treasury yields is roughly 1.5% as of now (late 2015). Using those inflation numbers would result in 4.5% real returns for stocks and 1.5% real returns for bonds, a brighter picture than that painted by other forecasts.
Admittedly it is not a large sample size, but here is a plot of how the 10-year predictions have done so far (1990-2014):
As noted previously, I like to keep track of these forecasts along with those provided by:
- Research Affiliates Expected Returns by Asset Class Tool
- Portfolio Solutions® 30-Year Market Forecast for 2015
- GMO 7-Year Asset Class Return Forecasts, December 2015