2019 Capital Market Assumptions

Paul Zemsky

Paul Zemsky, CFA

Chief Investment Officer, Multi-Asset Strategies and Solutions

Barbara Reinhard

Barbara Reinhard, CFA

Head of Asset Allocation

Elias Belessakos

Elias Belessakos, PhD

Senior Quantitative Analyst

Timothy Kearney

Timothy Kearney, PhD

Asset Allocation Strategist

Jonathan Kaczka

Jonathan Kaczka, CFA

Asset Allocation Analyst

Daniel Wang

Daniel Wang

Asset Allocation Analyst

Executive Summary

Our 2019 Capital Market Assumptions details our research on asset class returns, standard deviations of returns and correlations over the 2019–2028 timeframe. These estimates are a key input into our strategic asset allocation process for our multi-asset portfolios; they also provide a context for evaluation of the macroeconomic inputs that support the return estimates.

We expect that the next 10-year period will be characterized by returns below historical averages, to varying degrees across all asset classes. Our current forecast is for U.S. and international developed market equities to produce low single-digit returns, which are marginally lower than forecasted last year.

The macro inputs of a low potential GDP growth trajectory, reduced labor supply and an economy laboring to exit a shallow productivity regime, inform our forecasts. To combat anchoring on a single point estimate, we incorporate an alternate scenario into our forecasting methodology. This step delivers an holistic approach to our macro inputs, which produces blended estimates. Each year the asset allocation team determines through its research process if the alternative scenario is to have slightly better or worse macro inputs. This year we again used marginally higher productivity and profit margin inputs for the alternative case scenario.

In most cases, expected risk-adjusted returns for developed international market assets are lower than those for comparable U.S. assets. This partially reflects better U.S. growth prospects and some momentum bias inherent in our forecasting models. Expected returns for emerging market equities are above U.S. large-cap returns on both absolute and Sharpe ratio (risk-adjusted) bases, given the positive overall growth trends.

Our bond return assumptions imply that returns generally will be in the low single digits. We note that our projections do assume that moves in both bond term premiums and real interest rate premiums will cap the upside returns available to fixed income assets. We also highlight that the return forecast for cash investments has improved because of the gradual renormalization of monetary policy by the U.S. Federal Reserve.