Hereโs a story from Bloomberg:
That doesnโt sound good.
Hereโs the main argument:
Turning 30 just got a lot scarier.
A coming collapse in investment returns means that people that age today will have to work seven years longer or save almost twice as much to end up with the same nest egg as those of roughly a generation ago.
So says the research arm of McKinsey & Co. in a new report that argues that investors of all ages need to resign themselves to diminished gains.
The consulting company maintains that the last 30 years have been a โgolden eraโ of exceptional inflation-adjusted returns thanks to a confluence of factors that wonโt be repeated. They include falling inflation and interest rates, swelling corporate profits and an expanding price-earnings ratio in the stock market.
The next two decades wonโt be nearly as lucrative, even on the optimistic assumption that the world economy snaps out of its recent funk and resumes growing at a faster clip.
A lot of investors probably feel the same way.
Hereโs the problem โ this story was originally published in 2016. I wrote about it at the time โย Are Millennials Doomed in a Lower Return Environment?
These were the forecasts from McKinsey from the report:
Weโre now past the halfway point for these 20 year forecasts.
Since this was published the U.S. stock market is up well over 300% in total or 15% per year:
Inflation over the past 10 years was running at an annual rate of 3.3%. Thatโs a real annual return of 11.7%. So the past 10 years have experiencedย higher real returns than the โGolden Eraโ for investors in the 30 years ending in 2015.
Even European stocks, which havenโt exactly been lighting the world on fire this cycle, were up almost 10% per year since the spring of 2016.1
I think itโs important to take a look at old forecasts as a reminder about how hard it is to predict the future of the markets.
In May of 2010, Seth Klarman told The Wall Street Journal he was more worried than ever before in his career:
U.S. stocks are up more than 800% since he shared these concerns. Thatโs almost 15% per year.
In May 0f 2020, Stanley Druckenmiller told the crowd at The Economic Club of New York that, โThe risk-reward for equity is maybe as bad as Iโve seen it in my career.โ
The stock market is up almost 200% from those levels, compounding at an annual rate of nearly 18% per year.
Everyone assumed a recession was a foregone after inflation spiked in 2022:
It didnโt happen. The economy continues to grow.
Iโm not saying you should ignore risks and market warnings always and forever. This cycle will turn at some point. Investors will pivot from risk on to risk off. Stocks will go down. We will have a recession.
I just donโt think anyone has the ability to predict when that will happen.
I know itโs unsatisfying to hear that even the consultants, billionaires and legendary investors donโt know whatโs going to happen next but itโs the truth.
Sometimes the three most important words for investors are: I donโt know.
I donโt knowย when this bull market will end.
I donโt knowย if AI will lead to a utopia where everything is better or a hellscape where the robots steal everyoneโs job.
I donโt knowย if the economy will expand for the rest of this decade or go into a recession next year.
I donโt know if the new Tom Cruise movie will be a ridiculous flop or a revelation that gets TC his first Oscar.
I donโt knowย if the AI capex binge will lead to enormous returns for the hyperscalers or a huge crash.
Life โ and investing โ would be a whole lot easier if there were a group of soothsayers who could tell us all whatโs going to happen next.
Nobody knows whatโs coming next.
That inherent uncertainty provides both risk and opportunity.
The biggest risk is thinking youโve found a guru who can tell you what will happen on a consistent basis.
That person does not exist.
Further Reading:
No One Knows What Will Happen
1To be fair to McKinseyโs report, bond returns have stunk in the past 10 years. The annual return for the Agg was 1.5% per year, meaning bonds lost money to inflation.
