2021 Market Assumptions


February 2021

by Todd Jones

Dear Clients and Fellow Investors,

We are excited to announce the creation of our first annual capital markets assumptions. Given that this is the first time we’ve generated these numbers, we thought providing some context to this data would be a beneficial undertaking.  In the following paragraphs, we’ll attempt to answer a number of questions that are likely top of mind.  Please don’t hesitate to reach out to our team if you have any additional questions. 

What are capital market assumptions and how are they used?

Capital market assumptions are the returns we model as most probable over a set time period for a variety of different asset categories.  These numbers are critical for a couple of reasons. (1) From an asset allocation standpoint, we as investment professionals should be seeking the highest, risk-adjusted long-term return on behalf of clients. (2) We use these capital market assumptions and apply them to our financial planning software which helps our advisors model different scenarios for clients to consider over their financial life.  As you may infer, the greater number of quality inputs we have in our system, the better the output from the financial planning software.  To be clear, we are not trying to predict the future with any certainty.  What we are trying to do is provide our financial planners with realistic return assumptions based on numerous valuation methodologies.  Currently, we are only looking at a 10-year forecast as this time horizon tends to be long enough to capture a full market cycle and also smooth out anomalies that can occur in any given year.

Why are we publishing these assumptions now?

Clients have been hearing from financial media outlets, the Federal Reserve, and our financial planners that low-interest rates will be a problem “at some point” down the road.  Rather than take the easy road and pretend we aren’t at that point, we are taking a proactive approach and giving clients an estimate of what the next 10 years might look like from an asset class perspective.  These estimates should, therefore, help facilitate a discussion between clients and our financial planners to establish (1) an appropriate assessment of long-term goal feasibility, (2) awareness of what might be required to achieve said goals, and (3) strategies we are using to enhance long-term return achievement.

What was the catalyst for this publication?

At Gratus Capital, we care deeply about fulfilling our client’s goals.  We seek to achieve these goals by helping clients understand abstract concepts like the time value of money, real returns, and cash flow analysis over long planning horizons.  A key input to understanding any of these concepts revolves around return assumptions.  More specifically, we are trying to answer the question: are the returns we’ve experienced in stocks, bonds, and private investments over the last 10 or 20 years going to look similar to the next 10 or 20 years?  This is a crucial question to answer for some clients whose planning horizon is within the above mentioned time frames.  At the crux of the decision, is that we believe 100-year return assumptions do not accurately reflect the next 10 years; particularly in an asset category like bonds.  Over the last 100 years, bonds have returned ~4%.  The yield on the 10 year US Treasury bond is 0.91% and the yield on an average corporate bond with a 10-year maturity is 1.9%.  When the bond market tells us that a historical return assumption is unlikely, we believe we must update accordingly.


In summary, we believe that we are entering a transition period for capital markets.  Not only did we just experience the second pandemic in 100 years, but we also believe we may also be on the cusp of a fundamental change in the bond markets.  These features have (potentially) changed the return profiles of many asset categories.  As your investment manager, our task is to identify the best risk-reward available across markets and we believe that the capital market assumptions we’ve generated will play a critical role in guiding portfolios toward that financial plan attainment.  We hope you find the publication useful.  If you’d like to review our capital market assumptions, please contact your advisor.


Thank you for your continued confidence in our team.


Todd Jones, CIO