Capital Market Expectations:
Outlook for Fourth Quarter of 2005
By Adam Jared Apt, Vice President, Investment Team
It always bears repeating that LTSave bases its portfolio advice on long-term expectations for the financial markets, not on what it might expect over short periods, like the coming month, or quarter, or even year. Most of LTSave's client's are investing for longer periods. Even when the client is just one or two years from retirement, the best starting point for developing an outlook for the portfolio is still the long-term perspective.
But because the economic world is always changing, LTSave revisits its long-term forecasts every quarter. They rarely change very much.
And this quarter, our outlook has hardly changed at all. The markets are pretty much where they were when you last checked in with us. As of the beginning of July, the S&P 500 stood at 1,191.33. At the beginning of October (the fourth quarter), it stood at 1,228.81, only about 3% higher. It's gone down since. The long bond had a yield at the beginning of October of 4.32%, and at the beginning of July of 3.94%. Despite all that has happened in the last few months — natural disasters and continuing high oil prices — the stock market (which reflects the combined views of all investors) hasn't much changed its economic outlook, and neither have we. As we've said before, LTSave's view is that the stock market returns that we recall from the 1980s and 1990s are not going to be repeated in the next couple of decades, which is about as far ahead as we can look. So, we're still expecting stock returns of a little more than 7% per year (including the effect of inflation).
In August, the Congressional Budget Office (CBO), which is a non-partisan arm of the U.S. Congress, issued its revised economic forecasts for the U.S. The economic outlook, naturally, affects our outlook for the stock and bond markets. The CBO's economic forecasts have changed only very slightly from what they were before. It now expects real growth of the domestic economy to turn out to be 3.7% this year, 3.4% next year, and 3.2% for each of the next few years after that. Of course, you have to take these, like all economic forecasts, with a pinch of salt, or maybe even a rock crystal of salt, since the CBO issued these forecasts before the hurricanes, and also because, by law, they assume that the president's tax cuts will automatically end (as mandated in the original legislation) in 2011.
Still, the upshot of a comparison of these numbers with the numbers we were looking at three months ago is that our portfolio advice is pretty much unchanged from what it was.