If you invest now, I discuss what stock market returns you can expect as The Fed is hiking rates aggressively to combat inflation.
Everything in our portfolios might seem like doom and gloom, but I’ve got hope and suggested actions you can take to still earn decent returns over the long run.
With the overall stock market S&P 500 starting to be in a bear market at over 23% down YTD, more pain could still be ahead as The Fed just hiked the Fed Funds Rate by 75 basis points (0.75%) on June 15. A recession likely is underway with US GDP contracting by 1.4% in Q1 2022, mortgage rates soaring to 6.73%, and CPI inflation hit 8.6% as of May 2022.
It’s important to set realistic expectations so we don’t get paralyzed by disappointments and end up panic selling in a frenzy. We’ll be better off focusing on the positive and what actions we can take to preserve and grow our wealth that are within our control than worrying about whatever mayhem is happening in the markets.
I believe in us as investors and we’ll make it through these crazy times in the economy and stock market!
If we were invested in stocks over the 13 year bull market (I don’t include 2020’s short term flash crash which was reminiscent of 1987 style), we were fortunate to get more than decent returns as a riding tide lifted all boats generally. The S&P 500 delivered annualized returns of 16% over the past decade, which is double the stock market’s historical average rate of return! But a lot of “experts” are projecting this won’t be the case for the next decade.
This also led a lot of us to believing that it was normal for the stock market to return average returns of 24% per year from 2019 through 2021, almost doubling the S&P 500 from 2500 in 2019 to almost 4800 at the end of 2021. The good ol days of glorious market returns may be over for now.
Indicators that concerned me that the stock market’s highs were not sustainable included the Shiller PE, which hit 40 on 11/8/21 as the S&P 500 was around 4700. We hadn’t seen this level of market overvaluation since the dotcom bubble. This means suggested returns would be 2.5% if you divide 1 over 40.
When the S&P 500 rose another 100 points hitting 4800 by early January 2022, the Shiller PE hit around 37, giving a yield of 2.7% at best. More inflation probably creeped into the equation too.
Fast forward to mid-June 2022, the Shiller PE was 29.64, yielding future returns of 3.4% for the S&P 500. In the S&P 500’s recent 52 week low of around 3700 (on June 16 at 3666), that means the S&P 500 (SPX) lost 23% so far this year.
If we were expecting to get the stock market’s average rate of return, we would need the Shiller PE to go down to 14.3, which means roughly halving the SPX by about 1830 points down to 1960.
Coincidentally, this is not far from renowned investor Jeremy Grantham’s prediction that the S&P 500 will go to 1900. At the rate that the SPX has been declining for 6 months, this equals a loss of 183 points per month. If we extrapolate this trend out, that means we might end up in the 1900-2000 range in another 10 months if the S&P 500 sheds another 1830 points. This would be an additional 37% loss for a total of a 60% loss from the 4800 high.
If this reversion to the mean were to occur, that would put us at early spring or April 2023 only for us to get average stock market returns of 6.7% to 7% at a Shiller PE of 14-15.
So even though stocks jumped when The Fed announced the 75 bp hike on June 15, I don’t think that’s sustainable as it’s probably just some algos doing some trading before the downward trajectory resumes as we might see some dead cat bounces along the way.
The reason being for this is because The Fed is committed to fighting inflation by doing quantitative tightening of hiking the Fed Funds Rate, not buying bonds, reducing its balance sheet, and no longer “printing money” to bail out the economy and by extension, the stock market.
But of course the stock market could go up or down, nobody knows. But the Fed Funds Rate being hiked to tackle inflation affects interest rates for all debt and loans, including mortgage, student loans, car loans, and credit cards. So this naturally puts a damper on people’s and companies’ spending, thereby slowing the economy and making the future earnings of companies not as attractive at high valuations.
As US stocks and bonds are not the only asset game in town, some big name firms are projecting the following nominal rates of return on various assets over the intermediate term (7-10-15 years):
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki