Northern Trust just put out their projection for stock markets worldwide. Just like they did five years ago, they are projecting returns of just five percent (5%) per year for the next half-decade. Five years ago, Northern Trust said that US stocks would be up just 4.3 percent. How good was their forecast? Actual returns were 18.1%.1 That is a BIG MISS!
So why would they come back and repeat the same projection? I believe the answer is this: they want to manage their clients’ expectations. If they forecast five percent and actual returns are seven percent, they look great. If they forecast 14 percent and returns are just seven percent, their clients will be disappointed.
Put in dollar terms, a $500,000 account returning 4.3% would have grown to $617,171. But with an 18.1% return that $500,000 would have grown to $1,148,748! If you were invested in US stock for that full five years, you were likely very happy with your returns. But the Northern Trust accounts I have seen have not been invested just in US stocks. They are allocated to domestic stocks, bonds, commodities, real estate, and maybe other assets. Instead of achieving the 18.1%, they fell short.
Why did they get it wrong? And why do they think the exact prediction will be right this time? I will state upfront that our team at Adams Financial Concepts disagrees with their analysis.
Northern Trust feels there will be a reversion to “normal”, and that normal is mediocrity. They expect the global economy to settle into a low growth channel, and they believe the markets will be defined by stuckflation. Stuckflation means that inflation will be rising at an annual rate of 1.7% for the next five years, but central banks will face new challenges in dealing with income inequality and climate change. Those new challenges will outweigh the central bank mission of fighting inflation.
Further, Northern Trust foresees both the West and China seeking technology independence. This, they anticipate, will put pressure on companies to change the supply chain. That, in turn, will mean greater inefficiencies. They compare the importance of technology to crude oil as the key ingredient to the global economy.
We disagree.
Standard Chartered Bank in the UK did a study in 2011 that shows evidence of a super cycle which began at the bottom of the Great Recession in 2009 and will probably continue until at least 2030. Supercycles are times when worldwide GDP grows faster than average for an extended period of time. The first super cycle, from 1870 to 1913, was driven by the industrialization of the United States. The second super cycle, from 1945 to 1970, was driven by the rebuilding of Europe and decolonization of much of Africa and Asia following World War Two. The current supercycle is being driven by the emerging nations.
If there is a supercycle that will continue until the 2030s, and we believe there is, this means that there will be no reversion to mediocrity. In fact, we believe that COVID may be the Pearl Harbor moment of our lifetime. It is possible that the hardships of the pandemic will spur on dramatic changes in technology, demographics and lifestyles, and as that happens there will be investment opportunities. The past few newsletters have laid out some of the areas of change we anticipate in the coming decade.
Old companies will fade and die away and a new set of businesses, those created by and for the new technology and lifestyles of the future, will rise and offer investment opportunities. Change has been happening at an ever-increasing pace. Think of phones: Palm came out with the Palm Pilot, a PDA (Personal Digital Assistant) just 26 years ago. Just 15 years ago, there were no smart phones. At the beginning of 2022, over 6.6 billion smart phones were in circulation around the globe. Over 83% of the world’s population owns a smart phone.
Change will continue, and as it does we believe it will drive the super cycle. The high-growth economies may be those in emerging nations, but US companies will benefit. Over 50% of revenues on the S&P 500 companies are generated overseas. AFC does not foresee a reversion to mediocrity in the GDP. We see a vibrant and growing world economy.
At AFC we are not always right. But when we stumble, we want to know why, and we want our clients to know why. It is interesting that the Northern Trust forecast did not address why their last prediction was so inaccurate.
Check out the longer-term track record at Adams Financial Concepts. In our written agreement with each and every client we commit to a goal of doing better than the S&P 500 TR over the longer-term. We cannot guarantee it and we always have to say that past performance is no guarantee of future performance. But that is not just our stated goal, but our contracted goal.
1. “Capital Market Assumptions Five Year Outlook: 2022 Edition”, Northern Trust, August 11, 2021.
