The USA — Once an Emerging Market

Scott Krisiloff of Avondale Asset Management has a fine new piece up making the case that we might want to consider lowering our domestic equity return expectations in part on account of ongoing lower dividend yields. That concept is consistent with the long-term trend line for domestic equities. For example, the average return for the S&P 500 index was 11.50 percent for the period 1928-2013. For 1964-2013 (the last 50 years), the S&P’s average return dipped to 11.29 percent and from 2004-2013 (the last ten years), the average dropped to 9.10 percent.

It’s surely possible that these declines are more a function of the (arbitrary) dates chosen and/or the vagaries of business and economic cycles rather than a signal of some significant structural change. But it’s also possible that such declines are to be expected given the remarkable changes in the U.S. economy over those decades. It can be easy to forget that the USA hasn’t always been the world’s economic leader, and needn’t remain so (see below).

In the same way that we expect higher returns from investments in emerging and developing economies as compared to those in developed economies on account of higher risks, we might expect aggregate returns in domestic equities to have declined as the American economy has matured. After all, it wasn’t all that long ago that the USA was among the “emerging-est” of emerging markets countries.