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Jack Bogle: 5 Predictions for 2018 and Beyond

Jack Bogle: 5 Predictions for 2018 and Beyond

By    |   Monday, 20 November 2017 12:18 PM

Jack Bogle, the founder and retired CEO of mutual fund giant Vanguard Group, recommends keeping money in U.S. markets among his handful of predictions for 2018 and afterward, CNBC reported.

The S&P 500 has climbed 15 percent this year, or 17 percent including dividends, putting the market index on course for the best year since 2013.

Wall Street’s stock market strategists have begun unveiling their targets for 2018, and the consensus is bullish. Credit Suisse, Deutsche Bank, UBS and BMO Capital are among firms telling their clients to prepare for double-digit gains in the S&P 500, according to Yahoo! Finance.

BMO Capital’s Brian Belski estimated the S&P 500 will climb to 2,950 by the end of 2018, or 14 percent higher than last week’s closing level.

 “U.S. corporate earnings and the economy are improving, a trend that should propel stock prices higher again in 2018,” Belski said. His base case assumes three things: “Risk premiums remain largely static and path of interest rates grinds higher, but slower than expected; EPS growth matches current optimistic expectations providing a layer of support; and Policy questions/debate persist creating periods of elevated volatility surrounding the rhetoric.”

Bogle provided 5 predictions for 2018:

  1. U.S. market is safer than the global market. Bogle said the U.S. market is a proxy for international markets and there is no better place to invest. "U.S. companies are innovative and entrepreneurial," he said, cautioning that past performance isn’t necessarily an indicator of future results. The 10-year annual average return of the S&P 500 is 8.04 percent, compared with 1.73 percent for the MSCI EM and a 10-year 2.01 percent return for the MSCI EAFE, an index of stocks outside the United States and Canada. But YTD the three indexes are up 17.45 percent, 33.17 percent and 21.38 percent, CNBC said.
  2. Stocks will return about 4% a year  for the next decade or so rather than the 10% average annual returns of recent decades. His estimate is based on a 2 percent dividend yield, a "deadweight loss from the 4.4 percent it has been historically," and earnings growth of about 4 percent, which matches typical economic growth, to predict future investment return of 6 percent. He also looked at the difference between today's price-to-earnings ratio of about 24 times, and the historical P/E ratio to estimate the speculative return. "My guess — an informed guess, but still a guess — is that by decade's end the P/E ratio might ease down to, say, 20 times or even less. Such a revaluation would reduce the market's return by about 2 percentage points per year, resulting in an annual rate of return of 4 percent for the U.S. stock market," he wrote in the Little Book of Common Sense Investing.
  3. A bond portfolio will return about 3.1% a year over the next decade. Bogle developed the estimate based on a portfolio consisting of 50 percent U.S. 10-year treasury notes, now yielding 2.2 percent and 50 percent long-term investment-grade corporate bonds now yielding 3.9 percent
  4. Lower returns will pressure Wall Street firms. "The main force reshaping investing is the index revolution," he said. "Forty-one percent of all stock assets are in passive investments, and it's growing every day … The importance of (investors) getting the return first before the vultures are on it is going to become clearer," Bogle said.
  5. Impact investing could be less effective than advocates hope. Impact investing — also known as sustainable or socially conscious investing — is growing as more funds put money into the strategy. But impact investing is a form of active management, because it requires a manager to pick which stocks or bonds to include or exclude, Bogle said. “Every human being has to decide whether improving any social situation is more important than having a comfortable retirement," he said.

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Jack Bogle, the founder and retired CEO of mutual fund giant Vanguard Group, recommends keeping money in U.S. markets among his handful of predictions for 2018 and afterward, CNBC reported.
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Monday, 20 November 2017 12:18 PM
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