There’s no rule saying the future must look like the past, or that models that worked in the past will continue to work. The best we can do is work with the data at hand.
Forecasting is one part empirical research, one part observation and one part anticipation. Throw in a sprinkle of gut feel and you’re now a master practitioner!
On paper it sounds easy, but it’s impossible to analyze an infinite number of variables and mass psychology.
Below are 3 macro observations that attempt to narrow the forecasts for asset market returns
Of course, a forecast could be totally wrong. But analysts and investors continue to try…because getting things right every once in a while (or simply knowing the range of possibilities) can help grow and preserve wealth.
1. Currently, a standard portfolio of US stocks and bonds yields 3.66%. This is less than the yield on 3 month T-bills (calculations by Sitka Pacific Capital).
Only seven other times over the past century has the yield on the 60/40 portfolio been less than cash (second chart). Historically, this has preceded major market downturns.
2. AIAE modeling by RST suggests an expected 10-year annualized (from 2023-2033) US equity return of just 2.4%. This model has a good track record lining up with reality.
3. The predictive power of inverted yield curves has historically been strong. According to the chart below, there has never been a post-inversion equity market rally that was not fully reversed.
Bonus: Economic Indicators 101
Source: Manulife Investment Management