As I noted a couple of days ago, if you look at average future stock returns from our current valuation level of 26.3 on a Shiller P/E basis, they don’t seem all that bad. Historically, 10-year returns should be in the range of 7.5 percent and 5-year returns around 5 percent, on average. Not too shabby.

Averages conceal a multitude of sins, though, so let’s look a little closer. One question I have is whether the return spreads are consistent over time. If not, we have to ask whether the overall results are applicable to today.

After the decline in the stock market yesterday, the question on many people’s minds is whether this is the correction we’ve been waiting for. It could be. But even if it’s not, we may well be in for a turbulent month.

Let's look at what could be behind the market drop and where the market might be going from here.

Following up on yesterday’s post about what kind of returns we can expect from bond investments, today let’s look at stocks. With the market recently bouncing off all-time highs, it seems like a good time to consider what the future holds.

Are we poised for more of a run-up over the next several years, or is the market likely to disappoint in its returns?

One of the reasons investors fail to achieve their goals is that they have unrealistic expectations. When those expectations aren’t met, for whatever reason, they tend to sell.

Consider the well-known tendency to chase performance—that is, to buy a fund or stock that has been doing well. In doing so, the investor believes, he or she can expect future performance like that of the recent past. This leads to the momentum effect, which can drive prices up further, but ultimately may not be sustainable. When investors realize they won’t be getting the returns they expect, they sell, leading to downward momentum.

The S&P 500 is a solid benchmark for the stock market. Tracking 500 large companies, diversified by industry and sector, its movements can give you a good feel for what’s going on in the U.S. financial markets and the real economy. These are blue-chip companies with strong balance sheets and market position, and they should continue to grow and make money over time.

Good investments, right?

Although I touched on a few specific examples the other day, finding a way to express the failure of economics in the face of politics is difficult. There aren’t many smoking guns out there.

Or so I thought. Fred DeBaets, one of our fixed income experts here at Commonwealth, sent around the following chart yesterday morning. It shows that nine countries—all in Europe—have negative interest rates for two-year government debt.

A major concern of the baby boomer-dominated media, as well as the economics profession and government agencies (also dominated by boomers), has been the fate of—you guessed it—older workers, mostly boomers. How many of them are out of work and disabled, or able and willing to return to the workforce? Good questions, but hardly the only issues out there.

While I’m certainly worried about the aging boomers, my own position—right in the middle, in Gen X—makes me more concerned about the job prospects of the younger generation, who will be paying for my retirement (hopefully).

How much money companies make—their earnings—is a key factor in analyzing how expensive the stock market is. Depending on what you expect earnings to do in the future, you might decide that the market is either:

1. Very expensive (my own conclusion, based on longer-term valuation measures), or
2. Quite reasonable, if you assume current earnings trends are stable and likely to accelerate.

As I wrote last week, the ties between politics and economics are only growing stronger. Let’s look at some current examples of how the two are intersecting—and what this means for investors.

One of the things holding back the economic recovery recently has been slower-than-expected consumer spending growth. Apparently, consumer spending has been constrained by Americans’ newfound unwillingness to borrow.

I suspect, however, that this is an illusion created by a deeper problem. Consumers have the money—in fact, net worth has recovered to an all-time high—they just aren’t borrowing and spending.