The state of the markets and what to expect for future earnings growth

Vanguard Founder Jack Bogle shares his thoughts on the state of markets and what he expects for future earnings growth.


Rebecca Katz: All right, let’s take another live question. This is a good one, and, certainly, a lot of sentiment around this. This is from Loretta, and she says, “Everyone is saying that the markets are currently in a state we’ve never seen before. Do you think we can still rely on the historical principles we’ve always relied on today?” Is it different this time?

Jack Bogle: This time is not different, but stock valuations are higher than they’ve been. And the prospects for the future are lower than they have been in a long, long time. You know, in the period I’ve been in this business, the stock market has averaged a return of about 12% a year. And that’s just not going to happen again because at that time during that period, the dividend yield, and a very important component of stocks, stock returns, was about almost 6%, call it 5.5. Now it’s 2. That’s a dead-weight loss. The average earnings growth was pretty close to 6%. I don’t see that earnings growth happening in the future. I think it’ll be, if we’re lucky, 4%. And stocks have high valuations. The price earnings multiple, the essential nature, essential measure of value is around 22 times earnings and the norm is about 16. So putting those three things together, they’re all dear, expensive if you will, and so we can look for maybe stock returns and a balanced fund. And interest rates are 5.5% during that long period in my time in this business. And now they’re 2%, actually 1.6% on the ten-year intermediate-term Treasury. And so bond returns will be lower. So I think that we’ll be lucky to get a return of 4, 5% from a balanced portfolio in the next decade. I don’t look at this and I don’t want the viewers to look at it as saying, “He’s predicting something for the year.” I have never predicted anything for the year. I don’t believe in year-long. Too many things can go wrong. But in the long run, and this gets to the heart of that question, the same reason for generating returns, the reason that stocks generate returns is the same as it has always been, the earning power of corporations. They make earnings, they pay some out in dividends, they reinvest to build newer, faster, innovate, whatever they do, and that’s where earnings growth comes from, from that reinvestment by and large. So dividend yields are lower and the reinvestment will be lower and so the returns will be lower. I think that’s almost certain. And so just relax because the one thing that will guarantee your retirement plan will have an asset value of zero is don’t invest at all.

Rebecca Katz: True. Yes. Actually, we should save more.

Jack Bogle: Yup. So what’s hard and I think very important for the audience to understand is you have to accept the market returns for what they are going to be. Don’t reach beyond them. Don’t do something speculative. Don’t lever up to make up the difference. It just is highly unlikely to pay—Well it certainly will not work for everybody and highly unlikely to work for very many people.

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