The investment manager GMO has published its 7-year asset class real return forecasts for 30th September 2014 and they sync very well with our current market views. Based on current stock market valuations, GMO is forecasting negative real returns each year for the next 7 years for US equities of between -1.5% (US large cap stocks) and -4.1% (US small cap stocks). Their expected real return forecast for European stocks is little better at +1.8%, while emerging market equities appears to be the only real bright spot with an expected annual real return of +3.7%.
The GMO real return forecasts are worth paying attention to, as the next chart shows. When real return forecasts have been negative (boxes to the left), the median stock market real return over the next 7 years has also been negative. When real return forecasts have been positive (boxes to the right), the median stock market real return over the next 7 years has also been positive.
The last time GMO was forecasting negative real returns for the next 7 years was in September 2007 (green bars below), and we all know how the resulting period played out. Their current forecast in the chart below (yellow bars) is quite similar to their September 2007 forecast US and international equities. Also, while many were running for the hills in February 2009, GMO was quite excited about the outlook for the stock market and positioned accordingly.