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Dwindling Future Expected Returns: Could Crypto Be the Magic Bullet?

From the bottom of the 2008 financial crisis, the US equity markets have surged back, with the S&P reporting >3x growth over the past decade and showing 8 years of positive returns over the same period.

Much of the growth in the S&P 500 index can be attributed to the Fed-monitored QE program that printed new dollars and suppressed yields to near-zero levels, resulting in money flowing to riskier assets such as equities. In a low-yield environment, investors are willing to pay up for earnings growth and that pushes them further out on the risk curve. However, with valuation multiples looking stretched, the possibility of a recession, and the uncertainty over the future impact of trade wars, projections for future equity returns don’t look all that great. If the equity returns for the next decade are expected to be underwhelming as compared to that of the previous decade, where will investors go to for returns?      

S&P 500 Historical Returns
S&P 500 Historical Returns. Source: morningstar

The historical US Treasury yield curve has been on persistent downwards trend since the late 80s and now we are in a new business cycle paradigm and investment cycle where 2% yields are the new normal. As yields keep going down, institutional investors looking for returns are left chasing riskier asset classes in search of higher returns for their clients.

We had opined earlier on how pension funds, with over $16 trillion in AUM, are underfunded and how crypto could perhaps be the magic bullet for pension funds to achieve yields that are required to meet their future obligations. Institutional investors around the globe will need to eventually consider allocating a part of their portfolio to digital assets if they are to meet target returns for their capital. What could potentially trigger their foray into digital assets is the impending series of rate cuts in the next 18 months or so, according to market estimates.  

Historical 10 year yield
Source: Gurufocus.com
Historical 10 year yield
Source: CME

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