As we stumble our way through silly season we try and reflect while simultaneously imagining a better a future. A new you is on the horizon while the old you keeps whispering in your ear that you are who you are and no resolution is going to make a difference. This is the cycle of life. Highs and lows that are crafted into a narrative of seemingly pre-ordained progress. Our resolutions follow the same path as predictions about the market. An exercise that matters little in the long run. Will this be the year you get in shape? Will you finally learn Swahili? Will any of the market predictions you read come true?

To steal from Churchill, it appears we are facing a gathering storm. Interest rates and inflation are predicted to hit consumer spending. Yet I walk home from work every night past restaurants and pubs that are heaving. Talk of recessions fill the pages of newspapers while unemployment remains at historically low levels. The bear market is on every market commentator’s lips but we never passed that magical 20% drop in Australia – both domestically with the ASX and in Aussie dollar terms with global markets.

The stock market will finish 2023 at……………..

I just don’t know. If you know, please tell me. One of the follies of these annual exercises is that they all come with predictions about what will happen in the next year. I can make a credible case that the market will tank next year and revisit and break through the lows of 2022. Earnings estimates still seem too high. Profit margins are likely to continue to compress. History suggests that inflation is hard to control once it gets loose. We never got to the point where the market was truly cheap from a valuation perspective. Conversely, I can make a case that the worst is behind us. There is a lot of bad news that is already priced into the market. Economic expectations are low and any good news will be seen as a huge positive.

As investors we focus too much on the short-term. It is to our detriment. And I know it is irresistible but please afford me the opportunity to cast my gaze a little further into the future. Valuation levels are the most reliable predictor of long-term returns. High valuations mean lower future returns. Lower valuations lead to higher future returns. The market gets ahead of itself as returns outpace earnings growth and a bubble forms. The bubble pops and valuation levels fall which lays the foundation for the next bubble to form. This cycle gets obscured by the inevitable long-term rise in the market. This bubble was different. We entered the year at almost record levels of valuation. And the market fell but never to a level where it could be described as cheap.

My not so bold prediction is that over the next decade returns will be far below those we’ve experienced in the last decade. An average of mid-single digits in contrast to the double-digit annual returns that many investors seem to think is their birthright. This can happen in two ways. If we break through the lows of 2022 and this bear market reaches the depths of what we’ve experienced in previous down markets we will establish a foundation for future growth. The alternative is that we muddle through and face years of below average returns. Neither outcome is particularly appealing. If we are facing years of below average returns it will be important to concentrate on the little things. Think dividends instead of Cathie Wood’s exponential growth. Focus on minimising taxes and costs. All the boring things that actually matter over the long-term.