Buffett: Years of Single-Digit Stock Returns Ahead

Since the l8-year bull market in stocks ended in 1999, many investment gurus have warned that equities are headed back to historical returns – 5 percent to 10 percent per year.

With the stock market sliding lower after four years of gains, that forecast, held by Warren Buffett and many other luminaries, is starting to gain currency.

Buffett notes in his recent letter to shareholders that the Dow Jones Industrial Average rose only 5.3 percent at an annual compounded rate from 1900 to 1999. And that was a "wonderful” century, he points out, with the Dow soaring to 11,497 at the end from just 66 at the beginning.

If the Dow duplicates that return this century, it would close Dec. 31, 2099 close to 2 million.

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"It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an even number of thousands,” Buffett writes.

"If they keep reacting that way, a 5.3 percent annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years.

While anything is possible, does anyone really believe this is the most likely outcome?”

Not Ed Easterling, president of Crestmont Holdings, a Dallas investment firm.

He maintains that the stock market entered a secular bear cycle in 2000 that could last for 10 to 20 years.

Easterling says bull markets generally end with a price-earnings (PE) ratio of 25 and begin with a PE of 10. The market’s PE stood at 42 when the last bull run ended in 1999. But it has dropped only to about 20 for the S&P 500 now, he tells Crain’s Investment News.

Retirement plan managers "should maybe look at a 3 percent or 4 percent average return,” Easterling says.

John Hussman, a prominent money manager, notes that corporate profit margins also remain above their historical averages. In 2006, the latest full year for which data are available, corporate profits totaled 11.4 percent of GDP, a record high.

Hussman tells Investment News that stocks are likely to record an annual return of 3 to 5 percent over the next decade.

Buffett points out to his shareholders that if stocks register a compounded annual return of 10 percent per year this century, the Dow would hit a startling 24 million by 2100.

"If your adviser talks to you about double-digit returns from equities, explain this math to him -- not that it will faze him,” Buffett writes. "Beware the glib helper who fills your head with fantasies, while he fills his pockets with fees.”

Even Edward Yardeni, one of the 1990s’ most prominent bulls, is singing a different tune now.

The "Fed Model” he popularized, which compares stock yields to 10-year Treasury yields, currently indicates stocks are a buy.

But Yardeni himself doesn’t believe it.

"It has been a lousy indicator,” he tells The Wall Street Journal. "It hasn’t worked this entire decade.”

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