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It’s that time of year again for forecasting stock market performance. I believe investors are being gaslighted because their underlying assumptions are unrealistically optimistic. As I show in this article, slideshow and video, there are two incorrect assumptions in most stock return forecasts:

  1. P/E ratios will remain at their lofty levels throughout 2021; and
  2. Earnings will grow by more than 8%.

Sample forecasts

The following table summarizes typical return forecasts for 2021.

The average forecast for this sample is a 6.49% return, which is low by historical standards, since the U.S. stock market has returned 10% per year on average over the past 95 years. Most importantly, the narratives that accompany those forecasts are optimistic in seeing only the positives, namely:

  • Vaccines will end the pandemic;
  • Earnings will soar in an economic recovery; and
  • The Federal Reserve will support stock and bond markets.

There is little or no mention of the threats we face, as discussed below, hence my gaslighting assertion. Wall Street needs investors to stay invested.

The arithmetic of return forecasting

As shown in the following picture, forecasters need to make assumptions about three variables: dividends, earnings and the end-of-year P/E ratio. The green highlighted section of the table locates current forecasts that are consistent with the assumptions that P/Es remain near 30 and earnings grow by 8% or more.

The table also shows a 50% loss if P/Es return to their historic average of 15. In other words, it’s what could happen if the bubble bursts. But a pandemic didn’t burst the bubble, so what could? There are reasons the bubble exists and dangers that could spoil the fun.

Bursting bubbles

After COVID-19 was recognized as a pandemic in February 2020, the stock market plummeted 35%. Many said COVID was the match that lit the overvalued tinder, but the flame was extinguished quickly, and the bubble reinflated, even though the economy suffered. The stock market disconnected from the economy, but this is temporary. COVID is only one of many threats to the economy and stock market.

I warned of 10 threats in this video, summarized in the following picture.

No one knows how or when those threats will explode, but it’s likely that at least one will occur in this decade, a critical decade for baby boomers, as discussed in the next section. Two of these threats are especially dangerous: Per capita world debt has surged to more than $200,000 and the U.S. stock market has gone crazy.

When the stock market fell in the first quarter, a throng of articles advised investors to “stay the course.” That advice worked out this time despite the fact that it was not wise for baby boomers.

The baby boomer conundrum

There has never before been 78 million Americans worth $50 trillion simultaneously in the risk zone spanning the 10 tears before and after retirement, during which lifestyles could be devastated by investment losses. At this stage in their lives, the number one investment objective of baby boomers should be to protect their lifetime savings, but the average boomer is invested 60/40 stocks/bonds, which is too risky; it’s a mix that lost more than 35% in 2008. In other words, baby boomers are on the wrong course, so advice to stay the course is plain wrong.

The conundrum in moving to safety is two-fold: safe assets pay no interest, and, even worse, current money printing could radically reduce the purchasing power of money by bringing serious inflation. Consequently, baby boomers should consider protecting themselves with the following inflation hedges:

  • Precious metals, especially gold;
  • Other currencies, especially cryptocurrencies;
  • Treasury Inflation-Protected Securities: TIPS;
  • Commodities; and
  • Certain real estate, like farmland.

Staying the course could work out for younger investors with long time horizons because recoveries are likely, but some recoveries, like the Great Depression, take a decade to materialize.


Most stock market forecasters ignore the threats that are facing the economy and stock market, but investors should not allow themselves to be gaslighted. Younger investors will probably come through the next crash unscathed, but baby boomers cannot be that cavalier because they could find themselves living under a bridge eating cat food.

Please see How to Minimize the Impact of Inflation, Recessions, and Stock Market Crashes for some thoughts on protecting yourself. Also, Peak Prosperity is a good source of economic analysis that says it like it is.

Ron Surz is CEO of Target Date Solutions, Age Sage and GlidePath Wealth Management, and co-host of the Baby Boomer Investing Show that you can binge watch on Patreon.

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