Investment Report: A few thoughts on capital market forecasts

By Bill Hornbarger, Chief Investment Officer at Moneta


This is the time of year that many investment firms start the process of calculating Capital Market Assumptions (CMAs). These are simply estimates (typically intermediate to longer term defined as 7-10 years) of asset class returns and other relevant statistics such as correlation and volatility. These numbers are used across the industry for a variety of purposes including asset allocation, inputs for financial planning and general guidance on the markets.

Future returns are unknowable. The minute one commits a number to paper they have a high degree of confidence that it will be wrong. However, the CMA process is still a very worthwhile endeavor because it results in a review of market and economic conditions, investor sentiment, and valuations, among other things.

There are several different ways to formulate CMAs with varying levels of complexity. For fixed income, the process is relatively simple: beginning yield to maturity adjusted for default and recovery rates. For example, the 10-year Treasury bond currently yields 1.91%. Since default risk is negligible, a 10-year annual forecasted return (point-to-point) for this investment would be very close to that 1.91% level.

Calculating a return assumption for equities tends to center around some combination of the equity risk premium added to the risk-free rate. The equity risk premium refers to the excess return of investing in the stock market to compensate for the higher risk relative to a risk-free asset such as a Treasury security. Both components are variable through time and the risk premium in particular is open to debate based on the length of time and period it is observed. Consensus is that, over long periods, the risk premium averages 4% to 5% over Treasury bills.


A large component of the equity CMA is the risk-free rate. Using the three-month Treasury bill as a proxy, the average since 1954 is 4.3%. Adding 4% to 5% to that results in a return near the long-term average of large cap domestic stocks. Currently, the three-month Treasury bill (our risk-free rate) yields 1.55%. Simple math suggests that if the long-term equity risk premium persists (remember it is dynamic), the projected return for stocks is lower than history suggests. That, coupled with low projected returns from fixed income, suggest that investors are in for a period of below average portfolio returns (which is different from negative returns). Other indicators/factors we follow also suggest we are in for a period of below average returns. Valuations across most asset classes (relative to their own history) are above average, a development historically associated with less robust returns. Simple mean reversion also suggests that after a 10-year period of above average returns, it is reasonable to believe returns will be more muted.

This year (2019) has been a banner year for investors with the S&P 500 up more than 26% through early December and the Bloomberg Barclay’s Aggregate Bond Index up almost 9% for the same period. This is consistent with the above average returns for many asset classes we have seen in the decade since the Global Financial Crisis ended. We believe that we are entering a period where returns will be more grudgingly earned and saving and spending policies will be an important part of a healthy financial plan. The robust gains in the stock market of the past decade have somewhat overshadowed the muted 3.5%-ish returns from core bonds. In our opinion, that is much less likely for the next 10 years and investors should plan accordingly.

Global Highlights

Market Snapshot


Fixed Income

  • U.S. Treasury yields rose across maturities with the 10-year rate finishing at 1.78%. Short term rates rose more than long term rates leading to a flattening curve later in the month.
  • Rising rates during the month muted domestic fixed income sector returns.
  • Unhedged international bonds underperformed hedged on U.S. dollar strength amid rising rates.


  • Domestic equities posted positive returns on strong economic data and optimism regarding a “phase one” U.S. – China trade deal.
  • Growth broadly outperformed value during the month. Technology, industrials, financials and health care led while utilities and energy lagged.
  • International developed equities increased on rising consumer sentiment in Germany and promises of a new Brexit deal by Christmas. Emerging markets were modestly negative on poor economic data in China.

Real Assets

  • Commodities posted negative returns as metals fell sharply on declining global demand, stirring investor concern of global slowdown.
  • Domestic and international REITs fell as rates rose and investors weighed global growth concerns.
  • Milder-than-expected weather sank natural gas prices and apathy towards energy stocks reigned over MLPs.

Financial Market Performance


© 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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