August 17, 2016
Second Quarter 2016: Investment Perspective
Here we are showing the real (after inflation) expected returns for major asset classes over time. There are several points to consider. First, the gap between the 10-Year U.S. Treasury (blue line, 0% expected return) and the equity asset classes is near its widest point over the study period. This means investors are well rewarded for leaving the perceived safety of bonds to own equities — a concept known as the equity risk premium. Our portfolios are accordingly biased towards equities. Second, emerging markets have the highest going forward expected return within equities at around 10% followed by international developed (7.5%), and U.S. large cap (4.5%). We note that the developed and emerging international markets remain historically attractive, and client portfolios are biased towards these more attractively valued areas within equities. Last, some commentators have compared today’s market to that of the dot-com bubble, (left shaded area), noting the parallels of high relative returns from tech and biotech, a recovery in IPOs, and significant M&A activity. We disagree. Expected returns are not as low today as they were during the 1999–2000 period. More importantly, the equity risk premium actually turned negative as the expected return on U.S. stocks was lower than the yield to maturity on the U.S. 10-Year Treasury. As noted above, the equity risk premium today is high, and
On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market. We have included the first page of that piece below. If you would like to receive the full perspective, please contact us.