Sera Capital Q4 2019 10-Year Forecast

Q4 2019 10-Year Forecast

For those that are reading our forecast for the first time, our philosophy is simple.  The best interest rate forecast for the next 10 years is always the current rate on the US 10-Year Bond.  It’s silly to think otherwise since the rate today reflects the global viewpoints and wisdom of all participants.  Our inflation forecast follows the same logic.

Our equity forecast is slightly different.  Research indicates that a 1-year forecast of the S&P 500 is worthless based on statistical analysis.  The same holds true for forecasts up to 5 years.  However, as you start approaching the 10-year mark, forecasting gets more and more accurate.  What we do is aggregate the longer-term forecasts of the most reputable long-term forecasters and techniques to come up with our own.

To calculate our equity forecast, we take an average of GMO’s 7 Year, Research Affiliates’ 10 Year Forecast and Hussman’s 12 Year Forecast.

The following table represents the 10-year forecast from a passively held portfolio that includes just the S&P 500 and the US 10-Year government bond based on the accumulated wisdom of forecasters we follow and respect as well as historical evidence.  The table is based on a 1.70 % interest rate, a 2% targeted inflation rate and a -1.35% S&P 500 rate.

 

10-Year Before Targeted After
US Gov’t Bond S&P 500 Inflation Inflation Inflation Maximum
Allocation Allocation Rate of Return Rate Rate of Return Draw Down
0% 100% -1.35% 2.00% -3.35% 60%
25% 75% -0.59% 2.00% -2.59% 50%
50% 50% 0.18% 2.00% -1.83% 40%
75% 25% 0.94% 2.00% -1.06% 30%
100% 0% 1.70% 2.00% -0.30% 20%

The following is a link to the forecasters we aggregate in order to come up with our forecast.

 

1 Year Forecast – Shiler P/E: 29.8%

Shiller P/E is 75.3% higher than the historical mean of 17.

Implied future annual return: -1.7%

https://www.gurufocus.com/shiller-PE.php

(Not part of calculation 10/15/2019)

 

10 Year Bond: 1.70% (10/15/19)

https://finance.yahoo.com/quote/%5ETNX?p=%5ETNX

 

7 – Year Forecast – GMO: (8/31/19)

US Large Cap: -3.3%

https://www.gmo.com/research-and-commentary

 

10 – Year Forecast: – Research Affiliates: (10/15/19)

US Large Cap: 0.5%

https://interactive.researchaffiliates.com/asset-allocation.html#!/?currency=USD&model=ER&scale=LINEAR&terms=REAL

 

12 – Year Forecast – Hussman: September 2019

US Large Cap: -1.25%

https://www.hussmanfunds.com/comment/mc190906/

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