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Long-term strategic outlook

Market Outlook Dec 2018

A five-year returns forecast for major asset classes — updated twice a year to help you set strategic portfolio allocations.

Key Takeaways

  • Our three scenarios result in lower expectations for economic growth. We were previously forecasting a business-friendly boost to growth. But now our most likely scenario is one where the benefits of fiscal policy begin to fade toward the end of 2019 or early 2020, and growth returns closer to long-term trend levels.
  • Forecasted equity returns have risen since our last forecast. After some big market moves and volatility, valuations have become more favorable since our mid-year forecast that brought up total return forecasts for equity. Expected fixed-income returns could shift during the 5-year forecasted window. We expect returns in fixed income to remain weak in the earlier part of the forecasted period and then improve once the Fed stops raising interest rates.
  • Monetary and protectionist policies are key risks. A gradual rise in interest rates would accommodate our positive five-year forecasted returns. But, if the Fed continues to raise rates in the face of trade-related concerns, it will likely be detrimental to equities and risk-sensitive fixed income. Trade discussions are uncertain, and we believe that they continue to be a difficult-to-predict source of risk.

Forecasted five-year total average returns (%)*

Forecasted five-year total average returns (%)*

Source: Columbia Threadneedle Investments as of December 2018. Past performance does not guarantee future results.

Strategic outlook: Three possible scenarios. To calculate the five-year forecast, we consider three scenarios and calculate a weighted average based on the likelihood of each.

Most likely (50%): Return to trend. In this scenario the boost from tax cuts and fiscal stimulus fades away, monetary policy normalization continues and the U.S. fails to overcome demographic challenges and low productivity. These forces lower the level of economic growth in the U.S. back to trending levels.

Less likely (40%): Trade derails growth. In this scenario economic growth is derailed by uncertainty regarding trade conversations and difficult-to-forecast tariffs.

Least likely (10%): Business-friendly stimulus persists. In this scenario, the benefits of corporate tax cuts could improve productivity and increase the level of U.S. economic growth for a sustained period of time.


* Equity forecasts are based on three components: expected dividend payments, expected earnings growth and change in valuation levels (price-to-earnings ratios). Expected earnings growth is driven by expected economic growth, input cost changes and pricing power. Fixed-income forecasts are based on the shape of the yield curve, direction of interest rates, increase/decrease in yield spreads and timing of those changes. The major asset classes are based on the following indices: U.S. large-cap stocks (S&P 500 Index), U.S. small-cap stocks (Russell 2000 Index), Developed market stocks USD (MSCI EAFE Index), Emerging market stocks USD (MSCI EM Index), Cash (Citigroup U.S. Domestic 3-Month T-Bill Index), U.S. Treasuries (Bloomberg Barclays U.S. Treasury Index), Municipal Bonds (Bloomberg Barclays Municipal Bond Index), Global sovereign bonds USD (Bloomberg Barclays Global Treasury Index (excl. U.S.), Investment-grade corporate bonds (Bloomberg Barclays U.S. Aggregate Credit Index), High-yield corporate bonds (Bloomberg Barclays Corporate High Yield Index), Emerging market debt USD (JPMorgan EMBI Global Diversified Index), Absolute return (Citigroup U.S. Domestic 3-Month T-Bill Index, Commodities (Bloomberg Commodity Index).

For index descriptions, click here