The S&P 500 has roared more than 23% for 2019 and just set new all-time and closing highs, as the U.S. economy continues to hum along. But blow out the economic picture over the last decade or so and you get a much different view of the economy and the equity market.
Since the end of the Great Recession in 2009, just after the financial crisis, the U.S. economy's long 11 year expansion has been defined by meager growth rates and a broken Phillips Curve. GDP growth, which came in at 1.9% for 2019's third quarter, never toppe 4% in the current expansion. Investors have essentially demanded low interest rates from the Federal Reserve to spur growth (inflation hasn't gone much past 2%) and when the Fed hiked rates in 2018, sending the 10-year treasury yield over 3%, the market sold off hard.
Now, the Fed is easing monetary policy as growth decelerates, with the benchmark 10-year treasury yield under 2%. Meanwhile, the S&P 500 trades at 3,087, just under its all-time high of 3,097. More to the point, the average forward one-year price-to-earnings multiple on the index is at 17.2, above the 10-year average of 16.6 and "fairly valued" at best, according to several top strategists on Wall Street. This is against a background of slowing economic growth worldwide. While solidly above 0%, GDP growth has trended consistently downward in the past year-and-a-quarter. Recession is imminent and always is. Even after a recession, many believe the economy may never see robust GDP growth again.
Enter the potentially new normal for stocks, as told by one of Wall Street's oldest investment firms.
In its "long-term capital markets assumptions" white paper, Janney Montgomery Scott's Investment Strategy Group says it expects a "lower return world" for the next seven to ten years. The firm is "expecting low future returns relative to historical levels." The report said "A major factor for our lower expected returns is lower potential economic growth."
Since 1926, the average annual return for large-cap stocks has been just above 11%. Janney now expects the average yearly return for that class of stocks to be 7.5% over the next 10 years, roughly. More broadly, Janney is looking for an average return per year for growth and value stocks of 7.3%.
And now may not be the best entry point for an investor. "The current starting point for future returns is also unfavorable due to the mature economic cycle-we are in the record 11th year of the economic expansion," Janney said. The group also cited what it believes to be an average forward earnings multiple on the S&P 500 that is "fair-to-full." To start the current bull run, that multiple was blow 16 and had dipped below 12 in 2011. The current multiple is not close to bubble territory, but certainly doesn't indicate there are too many cheap stocks out there.
Still, the market has continued to trudge higher in the last month, with the S&P 500 up 5.6%. The White House has recently said it is very close to signing a partial trade deal with China that would roll back tariffs on Chinese goods scheduled for December and 2020. "The markets are pricing in a positive outcome ultimately, with China - U.S. trade agreements," Tony Bedikian, head of global markets at Citizens Bank told TheStreet. Such a deal could only be positive for the economy. "There has been some deceleration in [economic] growth, but the economy is still growing fine," Bedikian said. "Also, the market is focused on the Fed being accomodative enough to support the economy. It [low rates] provides a floor."
Importantly, China said Thursday morning the U.S. and China are cancelling existing tariffs. But "Which tariffs would be canceled, when, and subject to what conditions still need to be negotiated," wrote UBS' Marke Haefele, chief investment officer of global wealth management. "U.S. officials have yet to confirm the Chinese Commerce Ministry remarks. And comments from Washington just yesterday sounded less than optimistic, with an anticipated signing ceremony by Presidents Trump and Xi possibly pushed back to December."
Case in point: while some strategists are looking for slightly more near-term upside to stocks, there's structural long-term risk to the stock market.