The preceding decade will go down in history as one of the best 10-year periods for the U.S. stock market. From Jan. 1, 2010 – Dec. 31, 2019, the S&P 500 posted an impressive average annual return of 13.5%.¹

Nearly two months into the current decade, however, many investors are wondering how much longer the bull market can run and if we can expect the same levels of outsize returns in the coming years. In this piece, we’ll examine the confluence of variables that have fueled this long-running period of economic expansion and how the market environment may change in the next 10 years or so.

The first variable that has enabled the stock market’s runup is historically low inflation. Consumer Price Index² inflation has averaged about 3.6% over the last 75 years, yet in the previous decade, the annual rate of inflation averaged only half that at 1.8%.³ Aside from areas like housing, higher education and healthcare, many prices for goods and services have gotten cheaper or have remained flat.

This minimal inflation has contributed to the poor performance of commodities over the last 10 years as the Bloomberg Commodity Total Return Index was down an average of 4.7% per year³, and the London PM Gold Price returned only 3.4% per year.⁴ However, it also contributed to the relatively good health of the U.S. consumer which has helped sustain the U.S. economy’s lengthy expansion.

Low inflation has also allowed interest rates to remain low, which has supported the long bull market in stocks. With bonds paying so little in interest, investors have looked to stocks to provide dividends and the potential for dividend and profit growth. Low rates have additionally encouraged borrowing, much of which was used to buy real estate. Between 2010 – 2019, real estate investment trusts (REITS)⁵ in the Dow Jones U.S. Select REIT Index returned 11.6% per year.³

Looking ahead to the next 10 years though, it will be very difficult for U.S. stock market returns to maintain this level. Much of the benefit of low inflation and interest rates are already factored into markets. Because of this, we estimate that returns will be closer to historical averages with mid-high single digit returns for both stocks and real estate. The Bloomberg Barclays US Aggregate Bond Index returned 3.8% annually over the last decade³, but we expect future returns in the 2 – 3% range unless interest rates fall near zero.³

Keep in mind that it’s normal for the U.S. stock market to cycle through periods of higher or lower returns. For example, the period between 2000-2009 was one of the worst decades for S&P 500 as it averaged a 1% loss per year for 10 years. Investors missed out on returns during this time frame, but those that remained in the market recaptured them between 2010-2019.³ We believe the 2020-2029 time period will likely fall somewhere close to the average of these last two decades. While we think there is room for the stock market to grow and almost certainly exceed bond market returns, expectations should be for more moderate returns.

Sources:

1. Yahoo! Finance – S&P 500
2. Investopedia – Consumer Price Index – CPI
3. DFA Returns 2.0
4. Morningstar – London PM Gold Price
5. Investopedia – Real estate investment trust (REIT)

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