Go Tactical or Go Home - Part II  
Two highly respected investment firms' long-term market forecasts paint anemic picture.
 
Continuing on our theme of the markets being overvalued/overbought, we're now going to take a look at two well respected firms' views of the current market: GMO and Research Affiliates.

GMO and their highly respected co-founder and chief investment strategist Jeremy Grantham offer up their firm's 7-year asset return forecasts. Updated throughout the year, the forecast has proven to be quite accurate for each subsequent 7-year time period.
 

In the above chart, we can get a glimpse of just how dismal the GMO S&P 500 forecast actually is. When we start at a Shiller P/E of 26 (which last week's article showed was one of the highest overvalued levels in the past 100+ years), we can only expect real returns to be < 2% over the next 7 years.
 


When looking at a whole array of asset classes, GMO predicts that only emerging markets stocks will surpass 2% real returns for the next 7 years. Some asset classes, such as U.S. large cap, U.S. bonds, and international bonds are actually forecasted to have sizable losses over the same time period.
 

GMO's more in-depth look at the fixed income market shows that several bond categories such as high yield and emerging markets debt are expected to outpace U.S. cash and U.S. bonds over the next 7 years.



At this point you might be thinking, "Why should I even believe GMO's forecast? Many big firms make similar forecasts and the others seem much more optimistic." Well, GMO tracks their forecasting vs. actual market performance and has been doing so for most asset classes since 1994. As the chart above indicates, whenever GMO forecasted strong double-digit returns of between 12% - 14% for U.S. stocks, the results over the subsequent 7-year time period were right on the money. When they forecasted dismal negative 7-year returns, the results weren't as bad as their forecasts, but returns were negative nonetheless.
 
Need a 2nd opinion? Now we'll look into Research Affiliates' forecasts.

Research Affiliates advises on over $160 billion in institutional investment assets, as of year-end 2015. Rob Arnott serves as Chairman and Chief Executive Officer.

Similar to GMO, Research Affiliates also offers forecasts for all major asset classes. The one key difference is that Research Affiliates takes a slightly longer view in their forecasts, peering out into the future a full 10-years as opposed to GMO's 7-year forecast.
 
Similar to the previously mentioned GMO forecasts, Research Affiliates' own calculations show inflation-adjusted minor gains to losses in U.S. stocks and U.S. bonds. The "glimmer of hope" again comes from those same two areas outside the U.S.: International and emerging markets. Roughly speaking, Research Affiliates sees real returns of 6% - 7% for emerging markets and international stocks and around 4% for emerging markets debt. Also of note, they forecast relatively strong results for high yield bonds.


 
Before we can get too excited about the expected returns for international and emerging markets, we should also consider the fact that those higher returns are expected to come with substantially higher volatility, making the case for utilizing tactical and alternative strategies even stronger.
 
Bottom Line: 

Any objective look at the above charts tells us we may be headed for subdued market returns for the foreseeable future. Intuitively, it makes perfect sense. After watching the U.S. stock market rise over 200% during the past 7.5 years, wouldn't we expect things to slow down?

Again, we are not saying you should sell everything and go to cash. We don't make market calls like that. However, if indicators are telling all of us that the market is overvalued/overbought and that some of the brightest forecasters are telling us to get ready for difficult times ahead, then tactical and alternative strategies can have you better prepared for what could be a time of sideways at best or declining markets at worst.
 
Stay tuned for more on our continuing series... 


 
 
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Optimus Advisory Group's Mission
Optimus Advisory Group manages liquid tactical and alternative investment strategies that meet the needs of our clients.  We use a disciplined, quantitative methodology to build and manage our portfolios.  Over a full market cycle, these strategies are designed to provide superior risk-adjusted returns while maintaining a low-correlation to traditional market indices. 

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For more information about any of our programs, please contact us.  You may also download the fact sheets for any of our investment strategies on our website.  Each fact sheet contains strategy descriptions, performance results, backtesting research, disclaimers and disclosures for each model.

  

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Sincerely,

  


Steve Rumsey

Chief Investment Officer
Optimus Advisory Group
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Advisory services offered through Optimus Advisory Group,
a registered investment advisor.
Disclosures

The performance results shown include the reinvestment of dividends and other earnings. Comparison of the Optimus Advisory Group Programs to any other indices is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the Optimus Advisory Group Programs due to varying degrees of diversification and/or other factors. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. Optimus Advisory Group does not make any representation that the Optimus Advisory Group Programs will or are likely to achieve returns similar to those shown in the performance results in this presentation. Optimus Advisory Group reserves the right to trade different funds within their models.   

 

The historical S&P performance results (and those of all other indices and index funds used as proxies for indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual client or prospective client in determining whether the performance of the Optimus' portfolio meets, or continues to meet, his/her investment objective(s). It should not be assumed that any Optimus portfolio holdings will correspond directly to any such comparative index.    

 

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investment strategies devised or undertaken by Optimus Advisory Group) will be profitable for a client's or prospective client's portfolio. All performance results have been compiled solely by Optimus Advisory Group and have not been independently verified.   

 

The Optimus performance results do not reflect the impact of taxes.