Bull Has Legs to Run Another 10 Years If Belski’s Math Is Right

Jun 23, 2014 9:52 am ET

(For more Market Line insights, see NI MKTLINE.)

June 23 (Bloomberg) -- There’s a common question in job interviews that is incredibly tricky to answer, even though you know it’s coming. Where do you see yourself in 10 years?

The response says so much about the candidates’ level of ambition, confidence, and drive -- or maybe just their ability to conjure up farm-fresh baloney on the spot.

For investors interviewing today’s U.S. stock market to see how much longer it plans to stay on the job, BMO Capital Markets strategist Brian Belski has an attention-grabbing answer: The bull looks like it has legs to run another 10 years with 10.5 percent average annual returns from current levels.

Before discussing his rationale, consider how hard it is to precisely predict where the market will be a year from now, let alone a decade. At the beginning of 2013, Belski’s prediction for year-end level of the Standard & Poor’s 500 Index stood at 1,575. The benchmark gauge ended the year at 1,848.36, more than 17 percent higher than his forecast. Even the strategists closest to the mark, Tobias Levkovich at Citigroup Inc. and Savita Subramanian at Bank of America Corp., were more than 10 percent off.

Regardless of whether you have faith in Belski’s 10-year prediction or not, his report makes it clear it’s a well- reasoned call and he’s not conjuring up farm-fresh baloney on the spot. Here is the condensed version of his thinking and math:

Lost Decade

•“Lost decades,” like what followed the peak of the dot- com bubble in 2000, usually precede extended bull markets. His 10-year, 10.5 percent annual return estimate is based on what followed lost decades ending in 1982 and 1947. “Stocks typically enter a very long period of expansion after emerging from a period of negative 10-year returns.”

•Pent-up demand will cause an “impressive” increase in capital spending. Corporations were reluctant to spend on anything but buybacks and dividends over the last few years. “Sooner or later, companies will need to invest in their businesses to provide themselves and investors with future growth opportunities.”

•Demographic trends are the stock-market’s friend. Relative attractiveness of dividends will lure aging Baby Boomers away from bonds. Also the size of the “baby-boom echo,” or children of the boomers, is growing and “this cohort has historically had a direct impact on stock prices.”

•Relax about all the inflows. While flows into equity funds over the last year rival levels seen before the financial crisis, longer-term trends indicate “current levels are not as frothy as they appear.”

Anyway, kudos to Belski for taking a crack at answering the “where will you be in 10 years” question. Even President Barack Obama struggled with it this month when someone sprung it on him during the first-ever White House Q&A on Tumblr. The best he could come up with was where he’d be after the next commander in chief is inaugurated:

“I’ll be on a beach somewhere, drinking out of a coconut.”