Following 20 years of dynamic market growth, the first 10 years of the new millennium could prove disappointing.
Most economists, academics and money managers interviewed say stock market returns in the next 10 years will be a far cry from the 20%-plus gains of recent years. Predictions for the next decade range from 5% to 12% per annum.
Of course in 1989, when Pensions & Investments gathered predictions for the 1990s, no one forecast the phenomenal stock returns of this decade. Some even believed there would be a recession.
Now, all of the experts interviewed agreed the stock market boom will come to an end. But the cause of the downturn is up for grabs.
While technology has been the great driver of the '90s bull market, it could be the market's downfall in the near future, said Andrew W. Lo, professor of finance at Sloan School of Management at the Massachusetts Institute of Technology, Cambridge.
"The Internet bubble is likely to burst. . . . It may very well be that's the match that lights the fire," he said. And once that fire is lit, the inferno of investors selling might result in a market correction.
Overall Mr. Lo predicts the Standard & Poor's 500 index will have a nominal return of 10% per year for the next decade.
The proliferation of investment tools that are accessible to both institutional investors and individual investors might prove to be a problem as a market blowup becomes more likely. With many investors lacking a basic understanding of investing and not accurately using the technology offered to them, Mr. Lo said, "It's like giving a chainsaw to an 8-year-old."
Louis Holland, chief investment officer of Holland Capital Management, Chicago, agrees inexperienced investors don't realize how out of control some of the valuations of the market have gotten.
He predicts the domestic stock market will return 10% per year next decade, with an inflation rate based on historical rates of 2.5% to 3%.
In the 1980s, energy stocks were king and accounted for 27% of the holdings in the S&P 500. Today technology stocks reign, Mr. Holland said, accounting for 25% of the index at the end of November. He was quick to point out that the top 25 stocks in the S&P 500 account for more than 100% of the return of the entire index.
"This bubble will break at some point. I'm just not going to say when," Mr. Holland said.
James Paulsen, chief investment officer of Minneapolis-based Wells Capital Management, is not sure when the bubble will break, either.
So far, he is only sure of two ways the bull market may end: in fire or in ice. That is, in inflation or deflation.
"There is no way we will be able to see it coming," Mr. Paulsen said.
Although either scenario is grim, Mr. Paulsen believes the greatest odds are that neither will happen by 2010, and the S&P 500 should give a real return of 8% to 12% per year during the decade.
Burton Malkiel, professor of economics at Princeton University, Princeton, N.J., also is afraid inflationary pressures could bring the bull market to a close, but in his view, a recession is not likely.
He is worried about the valuations in the Internet sector, but acknowledges that we are living in the information revolution, which promises to be just as important as the industrial revolution.
But "people will be disappointed," he said of technology investors.
"We will be very fortunate to have high single-digit returns" in the next decade, Mr. Malkiel concluded.
Wayne Angell, chief economist for Bear Stearns & Co. Inc., New York, predicts an average real return of 7.5% per year for the next decade, with continued low inflation as a driver.
And while stocks have grown 15% faster the past 17 years than in any other recorded period, it's unlikely that will continue.
"I don't see how you could have expectations of a 15% growth rate (in the stock market) without stocks losing half their value in one 12-month period," Mr. Angell said.
Economic expansion should continue into the next century without much of a pause, although he contends we are in a new economic era.
While wages will continue to increase, he predicts, labor activity is likely to rise even faster, helping to keep inflation in check.
Donald Coxe, chairman and chief strategist at Harris Investment Management, Chicago, also is preparing for a new economy, one in which U.S. markets will have lower rates of return than in the past.
Mr. Coxe sees a 7% to 9% nominal return with 1% to 1.5% inflation over the next 10 years. The first two years will be even more dismal, with 4% to 5% in nominal returns, because of Y2K-related problems, he said.
The new economy brings with it a reversal for one of Wall Street's highly regarded maxims, Mr. Coxe said: "The Street hates uncertainty."
