What kind of investment returns can we expect on fixed income and stocks as of September 15, 2020?

by Marc-André Turcot, Corinne Sauvé-Boulé

To be realistic, we should expect over the next few years an annual return of around 1% from fixed income securities and an average annual return of between 4% and 5% from equities with a probable marked drop in their value in the short or medium term.


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Hello! Last month, we analyzed the return expectations for both fixed income and stocks. We have updated our research as of September 18 and are sharing with you our findings for this month.

Fixed-income investments

Once again, one can observe that interest rates have fallen from their all-time high of 15.32% in the early 1980s to now stand at an all-time low of 0.59%!

Interest rates – Long-term government bonds

Source : http://www.econ.yale.edu/~shiller/data.htm on August 31st 2020

Provincial bonds yield-to-maturity
1 year 0.28% Alberta - September 1, 2021
2 years 0.39% Alberta - September 1, 2022
3 years 0.69% Ontario - September 8, 2023
4 years 0.95% Newfoundland – April 17, 2024
5 years 0.94% Saskatchewan – May 30, 2025
6 years 0.88% Ontario - June 2, 2026
7 years 1.04% Quebec – September 21, 2027
8 years 1.12% Quebec – June 1,2028
9 years 1.23% Quebec – June 1, 2029
10 years 1.51% Manitoba - September 5, 2030
Average: 0.90%

Source : Factset as of September 18th, 2020

Here are the returns for a 1-10 year laddered provincial bond portfolio. The yield edged down from last month, from 0.96% to 0.90%.

So, again, we should expect a return of just 1% for the next several years from secure fixed income ...


Stock market investments

The price paid for publicly traded companies, according to the Shiller ratio, is currently at 30.63 times their profits. There has been a slight increase since last month, when the ratio stood at 29.61. The market was only this expensive back in 1929 and 1999, two periods followed by a sharp correction.

Price paid per one dollar of profit (Shiller PE ratio)

Source : http://www.econ.yale.edu/~shiller/data.htm as of August 31, 2020

We are therefore interested in knowing the return achieved by investors during the 15 years that followed such a high valuation of the stock market in the past.

Shiller PE ratio vs. Average annual return in the following 15 years

Source : Factset as of September 18th, 2020

On the horizontal axis, you can see different levels of Shiller's price-earnings ratio. It should be remembered that the higher this ratio, the more expensive the market is. The vertical axis represents the average annual return for the next 15 years. The blue dots represent all observed data and, finally, the black dotted line is the trendline of the graph. So, it is easy to see that the less expensive the market, the higher the returns for the next 15 years, and vice versa.

If we take Shiller’s current ratio of around 31, we can see that the worst return for the next 15 years was negative and very close to zero, while the best was around 6%. Based on the trendline, at the current ratio, we can expect an average annual return of between 4-5% years over the next 15 years.

This concludes our analysis of this month's expected returns. Thank you for reading!

Disclaimer

Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Marc-André Turcot, and not necessarily those of Raymond James Investment Counsel Ltd. Investors considering any investment strategy should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision.


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Demos Family Wealth Management
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Marc-André Turcot, CFA, F.Pl
Portfolio Manager
Raymond James Investment Counsel Ltd.

[email protected]
Phone: 514-543-6531

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