The Vanguard founder says low dividend yields, modest earnings growth potential, and still-low rates mean returns are set to be lower.
Modest Earnings Growth Potential: Vanguard Founder Jack Bogle’s Market Forecast
Hi I’m Christine Benz from Morningstar dot com. I’m at Vanguard headquarters to speak with Jack Bogle. He’s the founder of The Vanguard Group. Jack thank you so much for being here. Always great to be with you. Thank you for having me here. And I’m here for that bubbleheads conference. This is an annual event that honors you in your many contributions to the financial services industry. And we’ve been doing these video interviews for several years now it’s kind of a tradition. One thing I often ask you to talk about because they think you have a very intuitive way of approaching it is what you’re expecting in terms of market returns for the equity and bond markets in the next decade.
Sure that hadn’t changed from what we talked about last year or much. But there’s a reality to the stock market. Let’s take that first. And the reality is that the fundamental return the dividend yield plus the earnings of the companies drives the long term return of the stock market. The only gets in the way in the short term. Is a special libertarian or people that pay more for stocks. Are people going to pay less for a dollar of earnings in essence. And if for example the price earnings multiple were to go from 10 to 20 over a decade that would be 100 percent increase would be 7 percent added to the returns each year. So it can be very substantial. And it also can be negative. So the P E goes from 20 to 10 minus 7 percent or roughly 7 percent a year.
So where are we now.
Well the dividend yield is one point eight percent less than 2 percent. I’m looking for future earnings growth of around 5 percent. I don’t think we can do much better than that. Maybe it’ll get better this year. And with the tax cut. And. Maybe maybe a little bit better next year too but maybe 5 percent. So let’s call the dividend yield to.
5 7 by my numbers.
That’s the investor return 2 percent dividend yield 5 percent or Isgro. That’s a 7 percent return. And if the price earnings ratio is to go down a little bit I think one and a half percent off that 7 percent return which would be a five and a half percent return on stocks over that period. And that’s a little higher and I’ve been using maybe right maybe wrong I’ve usually been using about 4 but that’s a ballpark and don’t really matter what we guess in these areas. There’s no precision in this let’s say in the 4 to 5 percent range just for stock bonds are a different matter because only one driving factor for bonds in the long run and that is the current level of interest rates. So we use a combination of the 30 year Treasury which is around a little over 3 percent. And then we use 50 percent of that and 50 percent of the corporate rate which is around four and a quarter. For 25 percent. And that’s going to give you about a. 3 3 point eight percent let’s say but I’d rounded blending those two together return on bonds. And so 4 percent from bonds and a. Slightly higher percentage for the stock. So the point of this is not accuracy. I don’t I would not know to how to do that. I mean what should they do and how to do it shouldn’t be talking to you. You shouldn’t be talking to them but rather that instead of the high returns of the last 25 years or the market during Vanguard’s history the market’s gone up 12 percent a year. I’m talking now stocks alone. And if we get 5 percent in the years ahead. Just think about this for a minute at 12 percent a year. The market doubles in six years at 5 percent a year. The market doubles in approximately 15.