The first thing we know for certain is that whatever we predict in detail will likely be wrong. In 2009, for example, few, if any, economists called for the stock market to go on a record-setting run over the next decade. Few, if any, commentators predicted that the U.S. would still have a military presence in Afghanistan in 2019. A Trump presidency didn’t seem to be on the horizon. And so forth and so on. We have to be humble about what we can predict.
Even as we try to stay humble, however, we can make some predictions.
As a base case, economic growth and stock market returns are likely to be lower this decade than over the last one. This isn’t so much a prediction as it is a math exercise. Demographics—a known factor, since the babies have already been born—indicate that growth should be slower. Absent faster earnings growth, continued strong returns would depend on a greater degree of multiple expansion.
In fact, much of the past decade’s returns came from multiple expansion, driven by interest rate cuts. Over the next 10 years, however, there simply won’t be as much room to cut rates. So, the combination of slower growth and stable valuations should keep returns below the levels we have become used to. Something to keep in mind. But that doesn’t mean opportunities will be lacking.
The good news is that even if growth remains constrained, we should see it pick up as millennials reach their peak earning and spending years. We are already seeing signs of such a rebound in the housing market, with growth in new construction supported by rising demand. Expect this trend to strengthen. Millennials have gotten a slow start economically, but they are finally beginning to hit their stride. The economy as a whole will benefit.
The decade won’t be determined by demographics alone. Technology will continue to be an overarching driver of growth. Bill Gates was certainly right when he said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” Driverless cars are currently in a lull in the hype cycle, but they will be back. Virtual reality is now something the public prizes for gaming, but it is likely to change the world. Computational biology and genetic engineering are just starting to reshape medicine. The commercialization of space is moving ahead strongly. The past couple of decades have been extraordinary, and that’s likely to be true for the next one, too.
While the base case argues for caution, when we look at the possibilities ahead, the view is much brighter. The big picture for the coming decade—as for the last one—remains that while real risks are out there, incredible opportunities exist. In other words, the current situation is much like the one in 2009. May we look back in 10 years with the same kind of pleasant surprise that we now experience.