Capital Markets

How We Developed Our 2019-2028 Capital Market Projections

How We Developed Our 2019-2028 Capital Market Projections
4 min 44 sec

Callan develops long-term capital market projections at the start of each year, detailing our expectations for return, volatility, and correlation for broad asset classes. These projections represent our best thinking regarding a longer-term outlook and are critical for strategic planning as our investor clients set investment expectations over five-year, ten-year, and longer time horizons. Our detailed white paper, interactive webpage, and illustrative charticle highlight the projections in various ways.

For the period 2019-2028, we made gradual, evolutionary changes to our capital market expectations from our projections last year. We have increased our fixed income assumptions to reflect higher starting yields compared to one year ago, including a higher return for cash, but we have held constant our equity return premium over cash. As a result, we have narrowed the equity risk premium over bonds. Our 10-year projections include a likely recession (or two), as such events are a normal part of the path to long-term returns.

Economic Projections


U.S.: 2%-2.5%

Non-U.S. Dev.: 1.5%-2%

Emerging Markets: 4%-5%


U.S.: 2%-2.5%

Non-U.S. Dev.: 1.75%-2.25%

Emerging Markets: 2.5%-3.5%

  • We expect the U.S. economy to cool in 2019 and potentially bottom out in 2020 before rebounding.
  • Slowing global growth is likely to keep inflation in the U.S. constrained.
  • We anticipate that a messy Brexit and the potential for reduced trade with the U.S. will weigh on output in non-U.S. developed markets. Economic growth in the euro zone will likely slide to 1% this year and the next.
  • Inflation in non-U.S. developed economies is expected to fall short of central bank targets well into the projection period.
  • Growth will remain mixed across the emerging markets. Many forecasters predict that real economic growth in India will slow in each of the next three years from 8% to 6% but will still surpass the growth of China by 1 to 2 percentage points per year. Aside from India and China, major emerging markets are expected to grow at modest real rates.
  • Inflation varies much more across emerging market countries than developed countries. Tightening in emerging markets may not be over, with plans for rate hikes still on the books in many countries, at least through mid-2019. But rate cuts in 2020 are now entering forecasters’ discussions.

Equity Forecasts

Broad U.S. Equity: Russell 3000 Index

Return = 7.15%

Risk = 17.95%

  • Compound earnings growth in the U.S. is expected to be modestly above GDP growth given expected economic conditions and government policies.
  • Similarly, dividends have grown at a high rate, keeping yields in line with historical averages. Dividend yields have been remarkably stable for the last two decades even in the face of substantial changes in earnings and interest rates, so dividend yields are expected to remain unchanged.

Global ex-U.S. Equity: MSCI ACWI ex USA Index

Return = 7.25%

Risk = 21.10%

  • We expect weaker earnings growth in overseas markets due to slowing economic growth.
  • Non-U.S. developed market equity has historically had higher dividend yields than U.S. equity. We anticipate that income payouts will continue to be a greater driver of overall returns in these markets as payouts returned to historical norms in 2018.
  • Valuations dropped sharply in 2018 and are below historical averages, suggesting room for price expansion. However, we did not incorporate any P/E repricing adjustments in our forecast.

Emerging Market Equity: MSCI Emerging Markets Index

Return = 7.25%

Risk = 27.45%

  • Substantial economic growth will continue to support emerging market equities. Weak returns in 2018 drove valuations back below long-term averages after a year of solid growth in 2017. Future deterioration in earnings could push P/E ratios back up in the absence of further price declines.
  • Dividend yields fell only modestly over the last year. Relatively high inflation increases the nominal returns for emerging markets.

Fixed Income Forecasts

Broad U.S. Fixed Income: Bloomberg Barclays US Aggregate Bond Index

Return = 3.75%

Risk = 3.75%

  • We expect an incremental rise in interest rates across the yield curve over the next 10 years, with the long end of the curve rising more than the short end.
  • The primary driver of our higher expected return forecast for 2019-2028 is higher starting yields, coupled with yields gradually rising over the next decade.

Alternatives Forecasts

Hedge Funds: Callan Hedge Fund-of-Funds Database

Return = 5.50%

Risk = 8.85%

  • This forecast assumes that hedge fund alpha in aggregate after subtracting out fees is zero. In practice, hedge funds display significant divergence in returns, and the ability to select skillful managers could result in returns greater than we project.

Real Estate: NCREIF ODCE Index

Return = 6.25%

Risk = 15.70%

  • After adjusting for the embedded leverage in core real estate, we forecast the expected real estate return to be about 85% of the excess return (versus cash) of the U.S. equity market. When combined with the forecast cash return, this calculation results in a projection of 6.25%.
  • The real estate risk forecast reflects economic realities rather than observed volatility. Observed volatility is often less than 5%; however forecasting, for example, a 3% standard deviation implies that the real estate loss experienced during the Global Financial Crisis was a 10+ standard deviation event. Our forecast risk better represents the probability of a loss of this magnitude.

Private Equity: Cambridge Private Equity Index

Return = 8.50%

Risk = 29.30%

  • The private equity market in aggregate is driven by many of the same economic factors as public equity markets. Consequently, the private equity performance expectations remain the same as they were last year.
  • There is tremendous disparity between the best- and worst-returning private equity managers. The ability to select skillful managers could result in realized returns significantly greater than projected here.
  • As is the case with real estate, the projection for standard deviation for private equity is consistent with risk of loss rather than a measure of observed volatility. Day-to-day variations in value cannot be observed since private equity is by definition not publicly traded. Our forecast for private equity risk approximates the ratio of return to risk for the other equity asset classes we forecast.

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