Billionaire investor Warren Buffett, one of the world's premier stock pickers, is confident that equities will outperform bonds over the next decade. His statement comes as many prominent Wall Street firms and money managers forecast that stock investors should brace for slashed returns over the next ten years.
"If I had a choice today for a 10-year purchase of a 10-year bond at whatever it is ... or buying the S&P 500 and holding it for 10 years, I'd buy the S&P in a second," said the billionaire investor and philanthropist in a detailed interview with CNBC. He added, "Interest rates govern everything, and if there were a way to short 30-year bonds and own the S&P for 30 years, I would give you enormous odds that the S&P is going to beat 30-year bonds."
The Great Bull Market: Past 10 Years
· S&P 500; 263%
· Dow Jones Industrial Average; 269%
· Nasdaq Composite; 447%
Source: Yahoo Finance
Longterm Low Global Interest Rates
Buffett's logic is that the already long period of low interest rates will continue for many years in the U.S. and other global markets. While the benchmark 10-year Treasury note exceeded 3% last year as the Fed became more aggressive with its monetary policy, recent fears over slowing global growth and market instability have led the Federal Reserve to announce a pause in plans to boost rates further. “We may be in a new world, the world that Japan entered back in 1990. And, if so, stocks will look very cheap,” Buffett told CNBC.
Equity Bears Make Their Case
Many big investors are far less optimistic than Buffett. Even if stocks beat bonds over the next decade, equity returns are expected to shrink sharply, nonetheless. For example, returns on large company stocks have averaged 10.1% since 1926, and the S&P 500 index has posted average total returns of 14% yearly during the past decade, according to Kiplinger. But economists at Vanguard are predicting U.S. stock market returns will plunge to between 3% and 5% over the next decade, per CNBC.
It could be uglier than that. Sam Stovall, CFRA’s chief investment strategist of U.S. equity strategy, notes that the current bull market run is not only the longest ever, but has gained three times the amount of an average bull market, per Kiplinger. He warns that such rallies are often followed by declines of 40% or more.
Some market watchers also are eyeing foreign markets as an alternative to U.S. equities. Rob Arnott, founder of Research Affiliates, suggests that “the odds are 90 to 10 that emerging markets will beat U.S. stocks. He projects a 9.7% annualized return for emerging markets and a 7.5% return for foreign developed markets over ten years, in line with their 30-year average.
One fixed-income area where some experts expect better performance than equities is in investment-grade corporate bonds. Bank of America Merrill Lynch strategist Hans Mikkelsen expects demand for higher-quality U.S. bonds to continue to rise as fears of a recession ease and yields in foreign markets remain low, per Business Insider.