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Earlier this year OmniStar released an episode of Were Talking Money where Phil compared two approaches to funding retirement. The first was Dave Ramsey, who was adamant on his stance that investors could comfortably take an 8% annual withdrawal rate. The second comes from Susan Orman, a well-known financial planner who posits a more conservative approach, recommending a 3 to 4%% withdrawal rate. You can view the episode here: https://www.youtube.com/watch?v=1Ih5J_I9QKQ. The two so-called experts are at opposite ends of the withdrawal spectrum. But which one is right? Based on market returns that averaged a double-digit annual return the last ten years, the argument could be made that Ramsey and Orman are right, but is any of these outsized gains sustainable?
Major Index Performances (as of Thursday Close):
- S&P 500: The benchmark index dropped about 0.93%Â
- Dow Jones Industrial Average: The Dow lost 2.1%Â
- Nasdaq Composite: The index sank 0.40%Â
According to Goldman Sachs, the stock market’s decade long golden age will soon be a thing of the past. A new report from their portfolio-strategy research team forecast the S&P 500 would see an annualized nominal return of 3% over the next 10 years. If that is the case, then Mr. Ramsey’s approach would leave you broke, very quickly. By Goldman’s calculations the S&P 500 has a 33% probability of lagging inflation through 2034.
There are five factors that underline Goldman’s outlook. First, a stretched stock-market valuation implies lower future returns. Current valuations are elevated, with the cyclically adjusted price-to-earnings ratio in the 97th percentile. Yes, that is abnormal.
Second, market concentration is at its highest level in 100 years. Tech giants Nvidia and Alphabet have driven the S&P more than 20% higher year to date. While that has led the index to a series of record highs, it highlights a market with elevated volatility risk, and it lacks diversification.
Third, Goldman expects the economy to contract more frequently for the next decade. They predict the US would see four GDP contractions, that is double what we saw in the last decade.
The fourth headwind is corporate profitability. Assuming Goldman is correct on the potential contracting of GDP, Goldman believes sales and earnings growth will decelerate for the market’s biggest stocks. This will have an impact on the market.
Finally, Goldman illustrates the 10-year Treasury yield and its relative level to the Federal Reserves. The 10-year is yielding north of 4%, a significant increase since the Federal Reserve lowered rates in September.
Bottom line, no one has a crystal ball, and I think predicting performance of the market over the next 10 years is nearly impossible. However, Goldman does make some interesting points. Much lower than in recent months, the 10-year treasury yield remains attractive, and we are taking advantage while it lasts. Additionally, writing covered calls may enhance performance in a flat market. We believe active management is the prudent strategy, especially during this time of ever-changing conditions.
Have a wonderful weekend,
Your Portfolio Management Team
