The stock market is showing early signs of a return to historical normalcy over the next one to three years. You may be ready for this, but many of your younger clients probably aren’t.
As the market seems to be in the nascent stages of a return to historical averages, the challenge for many advisors will be to manage individual clients’ expectations for this different milieu.
Unless clients under 50 have an academic knowledge of market history or started investing at an unusually young age, they’re probably not accustomed to anything but a sustained bull market. And some may be unaware that value stocks ever outperformed growth.
This mentality among investing innocents is only natural, considering the totality of their experience: 13 years of a bull market that has been interrupted only briefly—the last time by the pandemic-related crash of March 2020, after which quarantine-enabling tech companies led a growth stock surge.
Depending on your view of where the market’s headed, you may eventually see the need to ease clients into a normal-market mindset. This move would be in response to a shift to value outperformance that appears to be fitfully taking shape now.
Here are some points to consider regarding early evidence of this shift, along with some client talking points that the data suggest:
• The Dow will probably rise in the next two or three years—but at a slower rate than it has over the past several. Over that last 11 years, which started with the economy’s slow climb out of the Great Recession, returns of the Dow Jones Industrial Average have been several percentage points above its 23-year average of 8.92%. The index’s 50-year average is 10.9%, and for the last decade, it has delivered about three percentage points above that. The next decade could easily be two to three points below the 50-year average, but still decent, compared with the many leaner periods that figure into it. For domestic equities over the next decade, the analysis firm Strategas is projecting an average annual return of 7%. Client talking point: Though the market probably won’t turn bearish, it will likely morph from a bull into a healthy calf—a kind of Benjamin Button market, but with a limit on reverse maturation.
• Various factors are poised to produce sustained lower returns, including: expected higher corporate and capital gains tax rates, and a likely continued rise in the conjoined twins of interest rates and inflation, the latter ultimately prompting the Fed to taper bond buying and raise rates. Client talking point: Tax increases stemming from a change in Congress and the White House, and the prospect of the Fed’s easing up on the stimulus gas pedal, may slow market growth.
• There’s early evidence that the growth-value see-saw is starting to tip the other way. This can be seen in two ETFs: the legendary (and at times, notorious) tech giant, QQQ, and the staid, old dividend aristocrat fund, NOBL. Over the past two years, QQQ has trounced NOBL, returning about 72% to NOBL’s 34%. But from March through May, the tide turned: NOBL gained about 14% while the QQQ has lost about 7%. The Fed’s affirmation of continued stimulus this month has emboldened growth investors thus far. But if the existing pattern holds, value will probably continue to post signs of ascendance and growth, decline. Client talking point: The growth party is winding down, so we should consider looking elsewhere—perhaps to value—for returns.
• Vanguard projects value beating growth by 5 to 7% over the next decade. Client talking point: This is significant because Vanguard is the pulse of the entire market.
• Our position in the current economic cycle stands to benefit value stocks relative to growth stocks. Value’s historical sensitivity to economic growth proved an albatross in the low-growth period from 2018 to 2020. But economic growth is now gangbusters—6.4% (annualized) in the first quarter of this year—as the nation began reopening from the pandemic. Client talking point: Value stocks should do far better now that the economy is growing briskly.