Welcome to Thoughts on the market. I'm Andrew Sheets, Chief Cross Asset

Strategist for Morgan Stanley. I'll log with my colleagues bringing you a variety of

perspectives. I'll be talking about trends across the global investment landscape and how we put those different ideas together.

It's Friday, November 8th at 2 p.m. in London.

Last week I discussed why we think the long-run return of a 60-40 portfolio in the U.S. and Europe over the next decade

could be just 4% a year, one of the lowest levels since the 1950s.

That generated more than a few questions and weren't some additional discussion of exactly how we end up with such a low number, especially given that the current market is so strong.

First, a low return from the bond side of a balanced portfolio looks pretty self-evident.

U.S. 10-year bond yields are just 1.9 percent.

German 10-year bond yields are minus 0.3 percent.

It's normal for bond returns to end up a little bit better than these headline yields would imply due to the effect of an upward sloping yield curve, but for 40% of that 60-40 portfolio, the fate of return looks sealed. Bonds are just arithmetic.

The swing factor, therefore, is what stocks will return

over the next decade.

Over the last 10 years, US stocks have returned 13.

1⁄2% per year, including dividends.

Over the last 50 years, they've returned 10.5% per year.

And yet going forward, we think the per year return will be just 5%.

What's going on?

We break the return of stocks down to three components.

First, how much can the earnings grow over time? Second, what kind of valuation will be applied

to those earnings? And third, what sort of income will the market throw off over the

meantime. Our return estimate is low because all three of these drivers of return

...