As an introduction to the real new millennium, Jonathan Clements of the Wall Street Journal corralled five market icons and asked them to share their market views. Although their time horizon was five years, their conclusions so closely parallel the range of long-term expectations found in my readings and conversations that I'll use Jonathan's concise survey results as a good overview:
Jeremy Siegel: "My feeling is that we might get a real rate of return between 5% and 8%. If you add inflation, you might get between 8% and 11%." Note that 11% is at the high end of the range.
Peter Bernstein: "...[he] figures stocks will deliver three or four percentage points a year more than inflation. He says that Treasury bond investors will probably earn comparable returns ..."
John Bogle: "He looks for the market's price-earnings multiple to fall below 20 over the next five years ... Results? Investors will collect just 3% per year."
Robert Arnott: "... reaches an even more dire conclusion. 'Our expectation is that the return over the next five years should be zero or less.' "
Robert Shiller: "It's quite possible that we could have negative returns for the next five or even 10 years."
Equity Risk Premium
As reflected in the survey above, there are innumerable opinions regarding the future of the equity risk premium, far too many to address in detail in this article, so I've elected to briefly describe the logic behind two examples that represent the range of opinions.
Siegel represents the "high estimate." Since the publication of his book Stocks For The Long Run, he has been the poster child for equity optimism. Consequently, it's sobering to find an optimist such as Siegel penning an article titled "The Shrinking Equity Premium, Historical Facts and Future Forecasts," that concludes, "the degree of the equity premium calculated from 1926 is unlikely to persist in the future." Agreeing with most other commentators, Siegel adds, "Furthermore, despite the acceleration in earnings growth, the return on equities is likely to fall from its historical level due to the high level of equity returns relative to fundamentals."
Siegel also concludes that the real return on fixed-income assets is likely to be significantly higher than estimated on earlier data. For practitioners, this is as important as the conclusion regarding the equity risk premium, and I'll address the implications later in this article.