Solutions Economic and Market Watch

Hello, and welcome to the Economic and Market Watch podcast for the week of December 02, 2024. This is John Suter of CFC.

When you see the number 500, what comes to mind first? Might it be the Indianapolis 500, like it is for me since I'm from the Midwest? Or do you first think about the big hit by The Proclaimers, "I'm Gonna Be (500 Miles)"?

Or maybe, if you're financially inclined, the first thought is the mighty S&P 500. All three are totally unrelated, but the number 500 is easy to latch onto for most people, like me, that are familiar with each. Here's a few more facts about all those 500s.

The Indianapolis 500 is the greatest spectacle in motor racing. This race has been run on Memorial Day weekend since 1911, only skipping the years 1917 to 1918 and 1942 to 1915 because of war. I knew all the drivers growing up, and I still set aside my Sunday, Memorial Day weekend, to watch the race.

The Proclaimers' song, "I'm Gonna Be (500 Miles)", refers to the challenging task of walking a thousand miles, 500 plus 500, just to be with your love. I like to walk, but I'm not sure I'd be willing to walk that far.

And finally, while the Dow may be the financial-media darling, the S&P 500 is frequently used as a proxy for the value of the entire stock market. This is because the stocks contained account for roughly 80% of the total value of stocks that are publicly available for trading. Many investors use it as a benchmark when evaluating their performance.

At my age, this should be the most important of the three, but I rarely pay attention to what is going on each day in terms of whether the index is up or down, mainly because I'm in it for the long run. However, I recognize its importance in the financial world.

Since the COVID pandemic crippled the U.S. economy along with the rest of the world, many economists misforecasted a number of things, namely the solid growth of the overall U.S. economy compared to the other G7 countries, the robustness of the U.S. labor market, and the resiliency of corporations in their earnings. U.S. equities have rallied following the global financial crisis, first driven by near-zero interest rates and later by bets on the resilient economic growth.

Besides wages, one source of wealth for Americans is the stock market. The other is housing, normally the biggest asset that most people own, although we are not going to focus on that sector today. Unfortunately, not every American has the ability to invest in either. For example, 4 in 10 Americans don't own any stock. Roughly one-third are renters and don't own their own home.

But it's never too late to start to invest if you can. Most retirement plans include an S&P 500 index fund as an option. One thing we know about the S&P 500 is, it is normally pointing skyward over time, meaning for long-term investors the return is positive. For instance, the return on the S&P 500 index over the past decade has been 13%. That's better than the historical average return of 7%.

To further elaborate on the success of the index, U.S. stocks have beaten the rest of the world in eight of the past ten years in terms of total return. That is a pretty impressive run, no doubt.

However, that was then. What about the future?

A recent study released by Goldman Sachs doesn't paint the rosiest of pictures for the next decade. According to their study, U.S. stocks are unlikely to sustain their above average performance of the past decade. Investors are turning to other assets, including bonds, for better returns.

Their study goes on to show that the S&P 500 is expected to post an annualized nominal total return of just 3% over the next ten years. That's actually below the historical return on bonds, which has been in the range of 4% to 6% since 1926. In fact, they see a roughly 72% chance the benchmark index will trail Treasury bonds and a 33% likelihood they will lag inflation through 2034.

Remember that stocks or equities are riskier assets than corporate bonds because their returns can vary over time, but are also considered the better inflation protection because of their higher returns.

The Goldman team goes on to say that investors should be prepared for equity returns during the next decade that are toward the lower end of their typical performance distribution. The main conclusion stems from the analysis that it is extremely difficult for any firm to maintain high levels of sales growth and profit margins over sustained periods of time. Equities as an asset class will face stiff competition from other assets during the next decade.

However, the Goldman study doesn't take into account the possibility of a Trump bump.

That would be a scenario in which his incoming administration might be able to stimulate economic growth faster, due to tax cuts and lessened regulations for corporations. Taxes definitely matter to corporations' bottom lines, and earnings are what drive stock prices. Only time will tell whether the Goldman study is spot on or just another big miss during these uncertain economic times.

We can't drive in the Indianapolis 500, and I'm not sure any of us want to walk 500 miles, and I, for one, sure do hope that the skyward trajectory of the S&P 500 index proves the Goldman study wrong. That's it for today.

As always, thank you for listening and be sure to download the Economic and Market Watch dashboard and also the intelligence brief. We'll talk to you soon.