No one expects 2020 to be a replay of 2019. Nor do any professional investors think the financial markets will display the same spectacular returns in the next decade that they did in the last.

Predicting 10-year equity market returns is no simple feat, but it’s a lot easier to estimate long-term results than what might occur in any given year, notes Brian Nick, chief investment strategist at Nuveen. At the start of the decade beginning in 2010, models would have indicated that equities would have averaged about 10% annually as they were coming off a relatively low base, he says. Instead, the S&P 500 returned about 13% a year.

Going forward, many like Nick think it would be foolhardy to expect U.S. equities to keep “doing the heavy lifting.” Models based on historical returns would signal investors could expect about 5% a year with dividends reinvested, he says. Sophisticated clients of financial advisors may understand this intuitively, but they’ve also grown inured to hearing the finest investment minds tell them to lower expectations for the last five years.

It’s also worth recalling that 2018 ended with many market participants anticipating a recession fueled by burgeoning corporate debt. Conventional wisdom turned out to be wrong as 2019 rolled into December looking like the fourth year of returns exceeding 20% since 2009.

Earnings are expected to rise in 2020, but some, including Commonwealth Financial Network Chief Investment Officer Brad McMillan, believe price-to-earnings multiples will drift down. He sees the S&P 500 finishing the year with single-digit gains as it vacillates in between 2,900 and 3,200.

Presidential election years typically are positive for the economy and equities, except in recessionary years like 2000 and 2008. As 2019 ended, fears of a downturn were receding.

What is more of a mathematical certainty is that bonds—at current interest rate levels—can’t produce the same kind of results they have for the last decade or four decades. Demographics are likely to keep interest rates low for the indefinite future, McMillan says. Low Treasury bond yields also can produce a floor for equities.

Sea Change At The Fed?
Some observers believe a sea change in Fed policy occurred in virtual obscurity earlier last year. For most of the last decade, central banks tried every trick they could to stimulate their local economies and rekindle inflation—without much success. “Every time they’ve cut rates, it hasn’t caused inflation and it hasn’t stimulated the economy,” says Margie Patel, manager of the Wells Fargo Diversified Capital Builder Fund.

Then in 2018, the Fed raised interest rates four times in response to what proved to be a short-lived bounce from a big corporate tax cut. In the process, the central bank caused a stock market collapse accompanied by widespread recession fears, so it cut rates three times in 2019, ending up almost where it started. And for what?

Patel believes Fed Chairman Jay Powell may have learned a lesson. In her view, the U.S. central bank has “fundamentally changed the game plan” it followed since the 1951 Fed-Treasury accord, an agreement that re-established the central bank’s independence after it had maintained artificially low rates during World War II. For the last 70 years, the Fed viewed its mandate as “spiking” the punch bowl when the economy turned soft and watering it down when the party got out of hand.

As Patel sees it, the notion of a cyclical economy has evolved. Business cycles haven’t been repealed, but there have been only three recessions since 1982—in contrast to seven in the 30 years before then. When she is frequently asked by advisors what inning the current economic expansion is in, her response is that “we aren’t in a game with innings” anymore.

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