Risk Premia Forecasts: Major Asset Classes - August 2, 2019

The Global Market Index’s risk premium is expected to earn an annualized 4.8%, based on revised data through July. Today’s update is unchanged from last month’s analysis. GMI is an unmanaged market-value-weighted portfolio that holds all the major asset classes (except cash). The performance forecast for this passive benchmark represents the ex ante premium over the projected “risk-free” rate for the long term.

Adjusting for short-term momentum and medium-term mean-reversion factors (defined below) reduces GMI’s return outlook to an annualized 4.5% forecast, which is also unchanged from last month’s estimate.

Today’s forecast for GMI continues to anticipate a moderately lower performance compared with the index’s trailing 10-year performance history. GMI earned a 7.0% annualized risk premium over the past decade – 2.2 percentage points above the current unadjusted long-run outlook. That’s a substantial difference, but the gap has narrowed in recent history—a reduction that’s long been expected on these pages. The main takeaway: today’s revised numbers reaffirm that GMI’s performance and similar multi-asset class portfolios are on track to generate softer results vs. the past decade-plus.

All forecasts are likely to be wrong in some degree, but the GMI projections are expected to be somewhat more reliable vs. the estimates for the individual asset classes. Predictions for the specific market components are subject to greater uncertainty compared with aggregating forecasts, a process that may cancel out some of the errors in the projections for the individual markets through time.