In Singapore, the Government Investment Corporation (GIC) acts as a sovereign fund (it manages close to US$ 800 billion.) It just reported its 5-, 10- and 20-year returns. Its annualized 20-year nominal return dropped to 5.8% from the 6.9% return it reported a year ago. “On an inflation-adjusted basis, the GIC’s 20-year return fell to a four-year low of 3.9%, due in part to a strong FY 2004 no longer factoring into the rolling calculation.”
In my experience, if an investor can achieve a real return on all his assets of above 3% per annum, he should consider himself a genius. [I am emphasizing here “all your assets.”]
The GIC long-term return is lower than what US financial assets have returned over the last 100 years or so. In the case of the S&P 500 Index, the annual total return (with dividends included) was 10.3% in nominal terms over the last 100 years – a number about which I have serious reservations.
Based on historical numbers going back nearly a century for a traditional 60/40 portfolio where 60% is allocated to the S&P 500 Index and 40% to five-year Treasuries, that portfolio has returned 8.5% a year since 1926 through April 2024, including dividends. According to Nir Kaissar at Bloomberg, “There were some scary moments along the way, but they were always temporary. In a severe slump, a portfolio could be down two to three times its standard deviation, which means this portfolio was down about 30% at times before recovering and moving on to new highs. But there were always new highs. That’s as close to a sure thing as it gets in investing. It’s apparently not good enough for investors.
In a 2023 Natixis survey, US investors said they expect their portfolios to generate 15.6% a year after inflation, a wildly unrealistic target and 8.6 percentage points a year more than financial advisers anticipate.”
Above we saw that the S&P 500 returned annually between 1926 and today a very respectable 10.3% in nominal terms. However, according to Natixis, investors now expect to obtain a 15.6% annual return in real terms. I believe the nominal returns over the last 50 years or so were already unusually favorable and that future returns are likely to be far lower – certainly so in real terms.
In essence, the Fed is confronted with the following problem. Cut the Fed fund rate now or in September and take the risk that inflationary pressure could accelerate. Alternatively, keep interest rates at the current level or even increase them and risk a severe economic slowdown as asset markets might tank.
The recent improved performance of the Russell 2000 Index versus the S&P500 and especially versus the NASDAQ 100, and the diverging performance between Nestle (NESN SW) and Unilever (UN),would suggest to me that stock picking is becoming more important. And should stock picking and active fund management not make a comeback I would at least think that, as I have explained in last month’s report, a meaningful shift in the market’s leadership away from the Magnificent 7 stocks into value stocks is taking place right now.
As mentioned in last month’s report, I expect the Fed to cut rates over the next six months, which should lift Treasuries somewhat – or so I hope. However, from a longer-term perspective Treasuries seem to be vulnerable. [My sense is that if I would lose money on Treasuries because interest rates would move up, it is likely that equities would tumble.]
I am enclosing a report about the Budget and the economy in India by my friend Shanmuganathan. Shan is a columnist and author of the book “RIP USD: 1971-202X ...and the Way Forward”. He can be contacted at shan@plus43capital.com
The current economic expansion in the US should be viewed with a critical mind. After all, Joseph Schumpeter wrote almost 100 years ago that,
“Our analysis leads us to believe that recovery is sound only if it does come of itself.
For any revival which is merely due to artificial stimulus leaves part of the work
of depressions undone and adds, to an undigested remnant of maladjustments,
new maladjustments of its own.”
With kind regards
Yours sincerely
Marc Faber
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