The McKinsey Global Institute has just released a new report with the following gloomy prognostication:
Our analysis suggests that over the next 20 years, total returns including dividends and capital appreciation could be considerably lower than they were in the past three decades. This would have important repercussions for investors and other stakeholders, many of whom have grown used to these high returns.
This report does one of the things I like least: It makes a forecast.
Longstanding readers probably will be familiar with my aversion to this type of marketing hype. What's more, it's for events so far in the future that not many people who are reading the report today will remember to hold McKinsey accountable 20 years from now (unless the forecast is right, in which case someone there will surely trumpet it).
At least the report has a pretty colored graphic to go with it:
There are a number of issues with this sort of report that deserve a more detailed critique.
First, it is filled with all manner of assumptions about growth in the U.S., Europe and Asia; some of them may be correct, but many of them are likely to be wrong. When fundamental assumptions of models are untrue, like a rocket pointed slightly in the wrong direction at launch, the trajectory of a projection is sure to be inaccurate.
Second, and perhaps an even more important assumption, is that the future will resemble the past. (Note I am not referring to mean reversion, where metrics such as valuation or growth eventually return to their long-term averages. Rather, I refer to the dynamic competition within the marketplace.) This kind of extrapolation is dangerous. Throughout the course of history, empires making this error have crumbled. So it's a bit trite but true nonetheless: Past performance is no indicator of future results.
Third, McKinsey's forecast meets all the conditions for a true financial-markets prediction:
-- It's about a specific asset class (stocks and bonds).