First, thank you for the question. I repeat my offer to send me your questions by email. They are a regular source of inspiration for this blog, and I will try to answer as many questions as possible.
The question is relevant, especially in light of the blog I wrote recently about the futility of making stock market or annual forecasts (Forecast Time). In this blog, I wrote that short-term stock market forecasts were of no value, but that “If we absolutely had to draw forecasts for the markets, it would be better to do so over a horizon of five to ten years.” This is perhaps even more true for a period of 100 years.
The exercise therefore has some value, but it is far from simple. Of course, many things could happen in the next 100 years. For example, some could foresee the end of the world as we know it. Nuclear war or natural disasters could occur, rendering any attempt to make long-term stock market forecasts invalid. However, if we invest, it is because we believe or hope that such events will not occur. In my opinion, it is better to ignore such possibilities, even if one knows that they are possible. As portfolio manager and author Howard Marks once said, “Most of the time, the end of the world doesn’t happen.”
As the reader mentions in his question, stock market returns for the past 100 or so years have been close to 10% on a compounded annual basis. Is there any reason to believe that they will be very different in the next 100 years? What key factors could change in the next century compared to the last?
Long-term stock market returns are a function of the growth of profits of stock market companies. For their part, corporate profits are mainly dependent on economic growth.
In turn, long-term economic growth depends, in my view, on two key factors: population growth and productivity gains.
It is difficult to predict what the productivity gains will be in the very long term, but I believe that they could be similar to those we have experienced over the last century. To be conservative, let’s say they will be a little lower. As for population growth, it is foreseeable that it will decrease significantly over the next few decades. This is a trend that has started in recent decades. This is also a subject I talk about in my book Avantage Bourse.
Thus, global economic growth in the coming decades will probably be lower than in recent decades. I would add that it will shift to developing countries.
As for the question of global warming and the ecological challenges facing the world, I may be naive, but I believe that humanity will be able to meet these challenges. I believe it is dangerous to bet against the ability of people and economies (not to mention businesses) to adapt and capitalize on the growth opportunities that arise. We can see climate issues as a huge risk to the economic growth of our planet or we can see them as a huge problem just waiting to be solved. I am of the latter camp.
In short, for the next century, I foresee sustained growth of the world economy, but less rapid than in the past. As for the stock markets, I also believe that we can bet on somewhat lower returns than in the past – I would say around 8%. Less, but still attractive compared to alternatives. More importantly, I continue to believe that equities will outperform the rate of inflation better than most alternatives.
Mark Twain said that “history doesn’t repeat itself, but it often rhymes.” If so, the next century will likely be littered with unpredictable events that will have major consequences for the future economy and stock markets. But as has been the case for the past 100 years, economies will adjust, and stock markets will continue to rise.
