http://www.kc.frb.org/publicat/econrev/er97q3.htm#Golob & Bishop
What Long-Run Returns Can Investors Expect From the Stock Market? By John E. Golob and David G. Bishop
When investors make financial plans, their strategies depend on the returns they expect from investments in the stock market. The expected returns from stocks affect how much investors save, how long they plan to work, and how they allocate their portfolios among alternative investments. Their strategies are most likely to be successful, of course, when they have realistic expectations about stock returns.
Over the past several years, stock returns have exceeded their long-run historical averages. For example, the 15 percent average annual return on stocks over the last decade is substantially higher than the 10 percent average return over the previous 100 years. Stock returns were particularly high in 1995 and 1996, averaging almost 30 percent for the S&P 500 stock index. Market observers have reacted to high stock returns in different ways. Many individual investors, for example, interpret recent market strength as the beginning of a new era, with 15 percent returns continuing into the foreseeable future. In contrast, market professionals are generally less optimistic. Indeed, some analysts interpret high stock prices as an indication that future returns will be below their historical average. Golob and Bishop analyze how macroeconomic fundamentals and high price-earnings ratios on stocks will affect long-run returns.
Hnery C.K. Liu