Weekly e Letter 3/10/2023 — Market Returns for the NEXT Decade

Vanguard is still the 900-pound gorilla and a substantial contributor to that fact is that they have the money and the team to produce mountains of research data.

Every now and then, without really looking for it, I run across some of their findings. This week was one of those times. Vanguard published their expected returns for markets for the next decade. I’ll show you the chart shortly, but why is this important?

My experience has been that if you ask a lot of people what they expect future market returns to be, they usually come back with a number in the 10% range. Which is ok, everyone deserves a guess. But then, people seem to use that 10% number in their planning exercises. If markets return 10% a year on average, then money doubles every seven years… about. (That is what’s called the rule of 72).
So have a look at the current Vanguard projections. Unsurprisingly, they have a lot of disclaimers, but the numbers are still rather interesting. Along with the attendant disclaimers, there is a useful table of data at the Vanguard website (www.vanguard.com). For your convenience we include it here:

Let’s go straight to the bottom line. The first line shows the expected average return on equities. It’s not 10%, not even 8. But no, it’s a range of 4.4% to 6.4%. If we kind of split the numbers, let’s say maybe in the area of 5.5%. How much of a difference does that make to our futures? Again, using the rule of 72, money at 5% doubles in about 14 years. There’s a big difference in having your nest egg double in 14 years rather than 7.

I note that non-US equities, whether one considers major markets or developing markets, look like they might have an edge. We’ll see.

Now they might be wrong. But people seem to be retiring right on schedule. On the chance that they might be closer to right than wrong, it probably would be a good idea to consider setting aside a few more dollars for your future.

It is the time of year when we typically remind people that 401k’s can be increased – give it some thought. Your future self might thank you.

Ron’s Market Minute — Fedspeak

The new employment figures were released this morning. As anticipated the number of new employed was again high, and higher than expected. We are currently in a weird universe where markets are (much more than usual) turning based on every iota of news. In a typical year, no matter whether markets are generally headed up, down, or sideways, they still change direction 2 or 3 times in a calendar year.

A big part of our job is to look at the directions of both the economy and the markets and then attempt to be invested in the main general direction of the markets. In other words, if markets are trending up, we attempt to emphasize investments that do well in an ‘up’ market, and if markets are trending down, we attempt to emphasize investments that do well in a ‘down’ market. (This is not always as simple as it may seem.)

By my count, we have seen SEVEN directional changes so far this year, and it’s not even mid-March! And without a clear idea of the main trend, markets have waffled.

So, because the employment numbers were again up (although not as ‘up’ as the January numbers) we have good news for the economy (good to have more people employed) becoming bad news for markets. The thinking is that when the economy is too positive, investors believe the FED will continue its mission to slow it down. And the FED prescription to slow the economy is to hike interest rates. Stocks and markets in general are not happy with higher interest rates.

At the moment, according to the CME FedWatch tool, market participants are betting the Fed will now approve a quarter-point rate hike at its next meeting on March 21-22. Importantly, this is a reversal from just Tuesday when Powell’s hawkish comments suggested a HALF point hike. Anticipations were for a quarter point hike before Tuesday.

We will (all) now divert our attention to the inflation reports coming in next week. Consumer Price Index numbers are due on Tuesday and Producer Price Index reports on Wednesday. These will be the main pieces of economic data coming in before the upcoming Fed meeting.

Markets reacted (as expected) by moving downward at the opening. It usually takes a couple of days for markets to show the direction after jobs numbers come out, and perhaps we’ll see yet another reversal of direction by the beginning of next week.
Perhaps the CPI and PPI numbers will come in hotter than expected and Fed futures will move toward an expectation of a HALF point hike. Strange times. Is inflation decelerating? Is it decelerating ENOUGH? Ultimately, the truth will come out, but we don’t expect it will be today.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-5506060-031023

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Past performance is not a guarantee of future returns – LFS-5390884-123022