The 2010 10-Year Stock Market Projection

Note: The purpose of this post is just to archive the original (2010) projection for posterity. For the most recent projection, see The 10-Year Stock Market Projection. The original post follows....

Expected Return for the Next 10 Years

Previous posts have shown the results of backtesting the initial version of my market projection model. In this post, we'll develop projections of 10-year stock market returns that extend into the future where we no longer have the luxury of knowing the actual results.

Projected 10-Year Stock Market Returns

Projected Dow 10-Year Returns

The above graph (click to expand) shows the projected 10-year annualized returns of
the DJIA (Dow Jones Industrial Average) Index, going back to end-of-year 2000. Each point on the graph is an estimate of the return that a hypothetical investor in the stock market would receive over the next ten years if he invested at the end of the "start year" and sold 10 years later -- reinvesting dividends during the intervening ten years. The estimates are as they would have been calculated at the beginning of each 10 year period.  For example, at the end of 2000 the model would have "predicted" that an investor investing at the end of 2000 would lose 0.9% per year through year-end 2010. How accurate that estimate was remains to be seen. However, as you can see from looking at previous results, the model has proved to be remarkably accurate in the past.

Stock Market Bubbles, Crashes and Their Impact on Future Returns

Year-end 2000 represents one of four times in the 100 year history that the model produced a negative 10-year projected total return. It's probably worth noting that the other three times were 1997, 1998, and 1999. The most negative projection of all time was negative 2.5% at the end of 1999; the tech bubble burst about 3 months later. Prospective returns increased sharply as a result of the ensuing bear market, then meandered mostly sideways from year-end 2002 until the end of 2007.

The crash of 2008 again improved valuations, and increased projected 10-year returns to 7.5% at the end of 2008 -- still below the long-term average of around 10%. Needless-to-say, the subsequent bull market has again reduced projected returns -- so much so that as of the end of 2009 the projected 10-year return was only 5.5%. Obviously, the actual results for these 10-year periods are not yet available since they all began less than 10 years ago.

Conclusion

As I have said before, I prefer to describe this as a stock market projection rather than a stock market forecast. The reality is, no one knows for sure where the stock market will be 10 years from now -- it's the future! I think of the above graph as establishing a benchmark. It says IF normalized earnings grow at the historical rate*, and IF 10 years from now the market is applying average* valuations in terms of earnings multiples, THEN these are the results an average buy-and-hold investor can expect. The chances of this scenario playing out exactly are, I think, remote. However, a look at previous results suggests the chances of actual returns being in the projected "ballpark" are quite high. In short, with all its imperfections, I think it's a good place to start our thinking about future returns.

Note: For preliminary projection through 2020, see 2010 Year-End Stock Market Update


* Results based upon my Stock Market Analysis Model/Spreadsheet. Average earnings growth rates and p/e ratios are based on "full-cycle" results from 1941-1982.

Related Materials

Rolling 10-Year Returns shows all previous 10-year returns from 1900 to 1999 for reference.
Projecting Stock Market Returns: The initial post in this series. Compares previous projected to actual returns.
How the Stock Market Projection Model Works discusses the methodology in more detail, and contains links to all of the posts that lay the foundation for this methodology.
Starting P/E Ratio vs. 10-Year Returns: Shows that the initial P/E has a significant impact on future returns.
Borrowing Returns from the Future: some evidence that bull markets tend to be followed by poor returns.
For a list of other popular posts and an index of stock market posts by subject area, see the sidebar to the left.

Bogle on Mutual Funds, by Vanguard founder John Bogle, discusses a similar methodology based on price/dividend ratios (see chapter 12 The Allocation of Investment Assets).

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This work is licensed under a Creative Commons Attribution 3.0 unported license.

Last modified: 2/16/2011