Philosophical Economics has a really nice essay on returns and what investors can expect going forward. The news is bad. We concur that returns are likely to be well below the experience of the past 40 years, even taking into account that the decade from 1999-2008 was truly abysmal.
For many reasons, valuations in 1999 were at absolutely incredible levels. Valuation-indifferent buyers of equities, largely focused on low cost index products, who have to buy every month because of the need to save for retirement are a major factor.
We believe that many historical rates of return are driven higher by one time factors that will not recur and therefore, we will see a significant revaluation, which will punish investors (particularly GenX and particularly early cohorts).
Note that the author has not accounted for changes in tax policy. Over time these things are somewhat cyclical, however, markets tend to experience significant downward valuation as taxes rise (since it reduces earnings and EPS, and also because it discourages redeployment toward better uses and finally because, investors care about their real after tax return and if you raise taxes, then the nominal pre tax return must go up to provide stable after tax returns and this means prices - at least relative to earnings, have to decline).
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