The Long-Term Market Outlook with David Mitchell

April 11, 2023

The Long-Term Market Outlook with David Mitchell

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The Long-Term Market Outlook with David Mitchell Show Notes

AllianceBernstein Regional Director David Mitchell recently joined Dean Barber on the Modern Wealth Managment Educational Series to discuss inflation expectations for 2023, but a lot has happened since he last appeared on The Guided Retirement Show two years ago to talk about the markets. David gave a long-term market outlook with Dean in March 2021. We’re going to review David’s predictions from two years ago and get his updated long-term market outlook.

In this podcast interview, you’ll learn:

  • Where we stand with inflation
  • The latest on bank failures
  • Time horizon and duration are critical when making long-term market outlooks
  • What the long-term market outlook looks like for stocks and bonds

Looking Back at March 2021

In March 2021, we were in the throes of the most rip-roaring bull run, coming off those COVID lows. It was one of the biggest, quickest runs that Dean and David have witnessed in their careers. And yet David said that the long-term market outlook from AllianceBernstein was around 5-5.5% per year on the S&P 500 for the next decade. By the end of 2021, people probably thought that AllianceBernstein’s long-term market outlook was ridiculous. At the time, the market was up 26%.

David’s Current Long-Term Market Outlook

We were at 4,300 on the S&P 500 in March 2021. Now, we’re at 4,000. That’s a -8% total return in two years. Suddenly, people are wondering where the 5-5.5% is that David and his colleagues were projecting in their long-term market outlook. Does that mean that we now can add 8% to 40-44% in the next eight years? Let’s see what AllianceBernstein’s long-term market outlook is now.

“I would say our long-term market outlook two years later has gone up from that low five range. We’re back in the mid-to-high sixes now. We’ll have our updated long-term market outlook out in the next few weeks.” – David Mitchell

That’s because we had a two-year period where we were negative. If you had invested in March 2021, David agreed that people probably thought that he was being neutral or even a little bearish with his long-term market outlook. And at the end of 2021 when the S&P 500 was around 4,800 and we’d just had back-to-back years of huge gains, so that just added to the skepticism of what seemed to be a negative long-term market outlook.

Time Horizon and Duration

That’s why when people ask David’s forecast of the stock market, he always needs to match that with time horizon and duration.

“Over the short term, markets become more irrational. The mathematical mechanisms can break down between the stock and bond market, especially the shorter time horizon you go. But that’s why I force people to say, if I’m going to give you an outlook, you need to give me at least two to three years.” – David Mitchell

A Brutal Year for Bonds in 2022

Nobody anticipated how quickly Jerome Powell and the Federal Reserve were going to raise rates in 2022. But that just backs up David’s point of the importance of time and duration when projecting a long-term market outlook.

In March 2021, David thought bonds might give you around 2% per year over the next decade. If you had a 60/40 portfolio when you were making 5-5.5% in stocks and 2-2.5% on bonds, that would give you around a 4% total return. But 2022 was one of the worst years ever in the bond market.

“My fun cocktail party nugget is that for the treasury market, we had the worst drawdown in U.S. treasuries since Alexander Hamilton was treasury secretary in 1791. That was when we were at risk of defaulting on the debts that we accumulated during the Revolutionary War, trying to pay off the French and others. That’s how bad last year was for someone invested in high-grade treasury, U.S. treasury bonds.” – David Mitchell

The Correlation Between Bonds and Interest Rates

We saw the yield on the 10-year treasury go from 1.1% to 4% from March 2021 to March 2023. Let’s think about the correlation between interest rates and the value of bonds. As interest rates rise, the value of those bonds fall. Now, obviously, as you hold it to maturity, you get your money back. But you’re still just going to get the coupon over time.

“If you bought the 10-year treasury at 1.1% and your intention was to hold it to maturity, you weren’t going to lose money. But you just guaranteed a very low return. It was much less than what inflation ended up being. So, your real return after inflation was well negative.” – David Mitchell

Long-Term Bond Market Outlook

Given what we’ve seen from the broad bond aggregate recently, let’s look at AllianceBernstein’s long-term bond market outlook for the next decade. The thing that David loves about bonds is that the math is a bit more certain than it is with stocks. There’s less forecasting involved because 90% of a bond’s return is its cash flow.

“If you look at the global aggregate or the U.S. aggregate, which is mostly high-grade treasuries, investment-grade corporates. It’s a very high-quality index. The yield to maturity on that is about 3.5% over the next six, seven years. If you were to hold that for the next six years, you’d annualize about 3.5% return.” – David Mitchell

Putting It All Together

So, to review, David’s long-term market outlook calls for 3.5% in bonds and 6.5% in stocks. For a 60/40 portfolio, that would put you in the range of 5-5.5%. Two years ago, he was saying maybe 4% on a balanced portfolio. Now he’s saying 5% or a little more. Is 1% a year really that big of a difference? Let’s see David’s reasoning.

“Here’s a stat that I read in some research that Alliance Bernstein did almost 15 years ago on longevity risk, the risk of people outliving their money in retirement. As scientific innovation was happening and people were living longer, we had to check ourselves to ensure that we had people invested correctly to sustain 30-to 35-year retirement. During your accumulation years, which we define as from 25 to 65, if you just add 1% incremental return a year, how many extra years do you think that equates to in your spending? It’s 10 years. It’s an extra 10 years of spending power.” – David Mitchell

A Lot Has Happened Over the Past Year

Now, let’s back up a bit and shorten the time horizon. There has been a lot that has happened over the past 12-15 months—the largest land war in Europe, the Fed funds rate increasing to 4.75-5%, major bank failures, etc.

“A lot of things have happened. First, many people believe that the Fed was late to start raising rates. The Fed thought that inflation was transitory, but many people thought the Fed should have started raising rates back in 2021 and done it more methodically. Now, they’re so far behind the eight-ball that they have gone too far. And because they’ve gone too far, we have an inverted yield curve unlike any other that David and I have ever seen.” – Dean Barber

Is a Recession on the Horizon?

We have an inverted yield curve from the six-month treasury to the 10-year treasury of 1.56%. In other words, you get a 1.56% greater yield on the six-month treasury than you can on the 10-year treasury today. Those inversions tell us that a recession is very likely in the coming months. Whether that’s three months, six months, nine months, 12 months, 18 months, we don’t know.

When someone says recession, that means a lot of different things to a lot of different people. I’m talking about a labor market recession. When I say recession, we would need to see net job loss and the unemployment rate rising.” – David Mitchell

The Fed’s Goal of Crushing the Job Market to Crush Inflation

And that’s what Jerome Powell is hoping for. He wants to kill the job market. Remember that the consumer is 70% of our total GDP. As long as the consumer remains resilient and strong, he’s going to have a really hard time bringing down inflation quickly.

We did briefly see negative GDP in 2022. But despite seeing back-to-back quarters of negative GDP, David doesn’t believe we had a recession in 2022.

“We think that there’s an asterisk next to that in the history books. So, are we going to see a labor market recession? We’re at about 3.6% unemployment rate today, one of the lowest levels it’s been in 60 years. The Fed’s model is showing that we need to get to 4.6%, 4.7% to bring inflation down to a more comfortable level for them. That’s about 1.3 million jobs. I would put the odds on greater than 50% of that happening. Now, the timing of it, I don’t know. Is it by the end of this year? I don’t think so. Is it by the end of 2024? I would think so.” – David Mitchell

Forward-Looking Earnings

If we have a labor recession and negative GDP growth, that obviously affects the forward-looking earnings for corporate America. David has lowered his earnings forecast for the S&P 500, for 2024.

“Every paid analyst needs to give a year-end forecast for what they think earnings per share in dollars will be for a given year. On January 1, the average analyst was at about $228 per share. At the time, AllianceBernstein thought that was a bit too optimistic for a variety of reasons. We had it about $10 lower. We thought the analyst community would come down to meet our expectations. Every week, on average, about a dollar of earnings has come out. Right now, we’re closer to $218, $220 where we started the year.” – David Mitchell

Where Will the S&P 500 Be at by Year’s End?

If we end the year with that being the earnings per share, what does that do to the valuation of the S&P 500 from where we started at? We know that markets aren’t rational, but we still want to get an idea on where we’ll be with the S&P 500 at $218 per share.

“Let’s just say we’re in around 17, 18 times multiple. And this would assume the Fed doesn’t cut aggressively if they start to loosen policy or cut. Maybe once or twice by the end of the year, but not to meaningfully change the discount rate or the policy rate. That would put us probably in an S&P range on the low side of 3650, on the high side to 3960.” – David Mitchell

We’re at 4,000 today, so we would see a little bit of downside. David says there’s the potential to go down 10% from here, but there’s also potential that we wind up the year about where we are right now or a little less.

The other case would be even higher if we hit this sweet spot where inflation’s coming down, there’s some job loss, but not enough to really take down corporate profits maybe much below 220. Then, the market re rates put a higher multiple because the 10-year treasury and other yields are coming down.

“You’re discounting those future cash flows at a lower rate, which just gets wonky. People ask me how I get to 4,200 or 4,300 on the S&P—back to where we were in March 2021. That’s how you would get there.” – David Mitchell

A Problematic Short-Term Market Outlook

We need a lower rate from the Fed to get there if earnings remain where they are. So, the question is whether earnings can remain there or is there too much softening in the economy because the Fed went too far? Is that forecasted earning for the S&P 500’s going to come in lower?

While we’re primarily focusing on a long-term market outlook, David sees a problem for the market in the very short term. It’s why he’s more bullish on fixed income.

“I don’t think that you could have earnings holding at a reasonable level, I’ll call it $220, basically where the market’s at today, and for the Fed to cut policy at the same time. Consider Powell’s rhetoric so far and his desire to be Paul Volcker incarnate and really slay inflation. He wants to get it back to 2% and that there’s no new normal of 3%. I just don’t know how he could aggressively pivot and become more dovish unless equities and the economy fall off a cliff.” – David Mitchell

Have Powell and the Current Fed Already Had Three Strikes?

We’ve mentioned that Powell and the current Fed have made two big mistakes. One was keeping rates too low for too long during 2021. Two has been going a bit too far, too fast with rate hikes. And there’s another strike that David thought of as well from a few years ago.

“I could take you back to 2019 when he blinked and started cutting. The market was down 20% at the end of 2018 peak to trough and then Powell pivoted. We had a huge runup in asset prices and valuations in 2019 because of the great Fed pivot of early 2019. So, I could argue this is kind of strike three.” – David Mitchell

Since the Great Recession, investors in equity markets have counted on the Fed to backstop market and economic turmoil. In 2022, the Fed turned its back on the market and the Fed turned its back on economic turmoil. The Fed put was basically removed.

The Fed’s 180

Suddenly, the Fed was fighting against everything that they had been helping to support and prop up for 15 years. Will Powell go back to that?

“The economy would have to roll over and meaningfully deteriorate. I think as such, corporate earnings would need to come down from $220 per share. There are bearish strategists on the street at certain firms that are saying earnings per share at $200 or less. That’s a 10, 15, 20% downside from here.” – David Mitchell

That would put us back around 3,200-3,300. If that were to manifest, David thinks Powell would blink and start to ease again. David and Dean are hoping it doesn’t come to that.

“I think the pain in getting there would be a meaningful drawdown in equity markets. And granted, if Powell pivoted, you might see some stability. But again, how long until those earnings recover? That would be the question.” – David Mitchell

What Else Is There to Include in the Long-Term Market Outlook?

There are a couple more things that we’re going to have David cover before he wraps up his long-term market outlook. We’re going to touch on fixed income shortly. But we really want to talk about how to navigate through a market that is forecasting 6.5% per year over the next decade.

That’s the broad market, but there are pockets of opportunity within that market if you are more strategic or tactical and going after those opportunities as opposed to just indexing and buying a broad index. The 6.5% is the broad index, but that’s not the target that David and his AllianceBernstein colleagues are shooting for over the next decade.

The best stock pickers at AllianceBernstein have outperformed their given benchmark by 1.5-2.5% a year. That would bump it up to 8-9% per year. But David doesn’t think that’s in the cards for an indexer. You need to be in the right spot because everything isn’t going to go up.

“It goes both ways. It’s not just about what companies you own. In a period of volatility and earnings deceleration like we’re going to see, it’s also about what you avoid. If you just buy an index, you’re beholden to own everything. Or you can just buy the 30 or 40 best ideas of a subset of stocks. Hopefully, own a lot of great companies, and at the same time, avoid 400, 500, or 1,000 companies that you don’t want to own for legitimate reasons.” – David Mitchell

Active Management Is Critical

It’s easy to see why active management is so important when looking where indexes were at at the end of Q1. The Dow Jones Industrial Average was negative. The S&P 500 was positive by about 4.5-5%. Then, the Russell 3000 was positive by a couple percent. And the NASDAQ, which got killed in 2022, was up about 14-15% this year as of the end of Q1.

“Suffice to say, if we want to do better than the overall market, we need to have active management.” – Dean Barber

Another Look into the Long-Term Bond Market Outlook

That goes for stocks and bonds. Let’s switch gears to bonds. David is slightly more negative than positive on stocks for his long-term market outlook. But people may be surprised to hear that he’s more positive on bonds after coming off a brutal year for bonds.

“This goes in the notion of how we tend to shop for everything else in our life when things are on sale or low. Bonds are the same way. Here’s one thing I love about bonds and why my heart is always kind of with the bond market. The only way you permanently lose money in bonds is if the issuer of the bond that you own goes bankrupt or defaults. Again, interest rate fluctuations are optics. At maturity, you know what you’re going to get. The math is the math is the math.” – David Mitchell

Remember that David said that a very high-grade portfolio is going to get you 3.5%. But if you start to sprinkle in some more borderline investment grade—maybe a little high-yield that’s attractive—you can get to a 6% starting yield. Pound for pound, what would you rather have?

How Much Risk Do You Want to Take on?

David is saying that the 500 stocks in the S&P 500 look better, but thinks it’s still going to only get you maybe 6%. There is a lot of variability around earnings, multiples, etc. with those stocks, though. What if David built you a bond portfolio today with the starting yield of 6% and the same return, but with more certainty in getting that return and a lot less risk.

Retirees and people nearing retirement will tend to fly to safety in those bonds. But people are scared to death of bonds today because of what happened in 2022.

“It’s recency bias. We always talk a lot about behavioral finance and sciences. I’m a big Daniel Kahneman advocate. This goes into what he calls anchoring a recency bias. When you’re coming off the worst market for anything ever, that doesn’t make it feel great to buy low. It’s like the old advertisement of the kid eating their vegetables. There was a sign that said this is what it feels like to buy low.” – David Mitchell

Reviewing David’s Long-Term Market Outlook

So, let’s sum up what we’ve learned from David. He’s saying that you can build a decent bond portfolio with fairly high quality across the board and yields around 6%. You can do the right type of stock picking and potentially get 8-9%. Suddenly, your next 10-year average with a 60/40 portfolio like that is around 7-7.5%.

“That’s where a person needs to be to take that 4-5% distribution rate during retirement and still keep up with inflation.” – Dean Barber

Stay Tuned for David’s Next Long-Term Market Outlook

Dean doesn’t plan on waiting two years again to provide an update on David’s long-term market outlook. We’ll likely visit with him again in about a year, if not sooner if something pressing comes up.

“It’s fascinating to look at what we were talking about two years ago and where we are today. The long-term market outlook is still the same. It’s just that we’re at lower price points today from where the markets are now and where bonds are priced at today. We can get a little bit better by being more tactical, more strategic as opposed to just owning the indexes.” – Dean Barber

Learning About the Financial Planning Process

And remember that your investments are just one component of your financial plan. A lot of people think that their investment strategy is their financial plan, but that’s not the case. We haven’t tied in how tax planning, estate planning, and risk management are also pivotal when it comes retirement planning. You can see how all that comes together for planning your retirement by using our financial planning tool. Click the ”Start Planning” button below to get a feel for the experience that our CFP® Professionals walk our clients through in our Guided Retirement System.


If you have any questions about what David and Dean reviewed in this long-term market outlook or how to go about building your financial plan, just let us know. Working with a CFP® Professional leading up to and through retirement is critical. That’s why we’re giving you a chance to see what that is like as well when you schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. We can meet with you in person, by phone, or virtually.

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The Long-Term Market Outlook with David Mitchell | Watch Guide

Introduction: 00:00
Looking Back at 2021: 02:05
Looking at Today: 07:31
The Long-Term Outlook: 13:44
Looking at the Fed Put: 18:52
Navigating Through the Future Market: 20:27
Outlook for Bonds: 23:01
Recap: 25:54
Conclusion: 27:34

Resources Mentioned in this Podcast

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.