Tags: Stifel Nicolaus | Barry Bannister | stocks | investing

Stifel's Bannister: Stock Gains Will Be Paltry for Next 10 Years

Stifel's Bannister: Stock Gains Will Be Paltry for Next 10 Years
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By    |   Thursday, 01 October 2015 06:00 AM

Stock investors should expect the market to rise 3.5 percent a year until the middle of the next decade as company profits nudge higher and valuations get less expensive, said Barry Bannister, head strategist at Stifel Nicolaus & Co.

Those meager gains may put a crimp in the savings and spending plans of many investors.

Bannister estimated the S&P 500 stock index will rise to 2,900 by the end of 2024 from about 1,912 today. Adding dividend payments will boost yearly returns to 5 percent to 6 percent, he said in a Sept. 28 report obtained by Newsmax Finance.

The long-term compound annual growth rate for the S&P 500 is 9.1 percent including dividends, not adjusted for inflation.

The Federal Reserve’s easy money policies since the late 1990s have made stocks expensive compared with their long-term trends, effectively “front-loading” the bull market, according to Stifel’s analysis of cyclical adjusted price-to-earnings ratios of the S&P 500.

“Talk of a ‘secular bull market’ overlooks the way the Fed created the bullish S&P 500 trend since about 1998,” Bannister said. “Overpaying for normalized earnings has implied a very low return [for] the next decade.”

The S&P 500 would be at 944 today if the positive effects of the Federal Open Market Committee’s meeting days — when central bank officials convened to set interest rates — were removed, according to Stifel’s analysis.

After bottoming at a 12-year low in March 2009 as the global economy suffered its steepest decline since the Great Depression the stock benchmark has climbed 280 percent.

Pensions Going Broke

Paltry stock gains in the next 10 years will pressure investors who are banking on higher returns to pay for education, health care and retirement. In particular, funding shortfalls are growing for public-worker pensions funded by taxpayers.

The difference between the benefits state governments have promised to their workers and the money available to meet those obligations totaled a whopping $968 billion in 2013, up $54 billion, or 6 percent, from 2012, according to a July study by The Pew Charitable Trusts.

The unfunded liabilities will grow without budget reform, the study said.

"State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt," according to Pew.

Negative Rates

A coming economic decline may push the Fed to set interest rates below zero — that is, banks would be charged for holding cash at the central bank — in a frantic attempt to revive growth, said Albert Edwards, global strategist at Societe Generale.

He said he recently mused over the possibility of rates dropping to -5 percent.

That would mean replacing zero interest rate policy, or ZIRP, with negative interest rate policy, NIRP.

The Fed responded to the 2008 financial crisis by cutting its target interest rate to record lows of near zero percent, where it's been ever since. The central bank also pumped trillions of dollars into the financial system through several “quantitative easing” programs of buying government and mortgage debt from banks.

“The next U.S. recession will probably arrive a lot sooner than most investors expect and will likely see more desperate monetary experimentation from the Fed,” Alberts said in a Sept. 24 report. “It goes without saying that deeply negative interest rates would be accompanied by a massively expanded QE4 in the U.S.”

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Stock investors should expect the market to rise 3.5 percent a year until the middle of the next decade as company profits nudge higher and valuations get less expensive, said Barry Bannister, head strategist at Stifel Nicolaus.
Stifel Nicolaus, Barry Bannister, stocks, investing
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2015-00-01
Thursday, 01 October 2015 06:00 AM
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