Threat of ‘regime’ change hits Wall Street

The stock market is in the midst of a "correction" that has taken the S&P 500 negative over the past year. But the bigger concern among investors is that after years, and really decades of gains, the good times may finally be over, as the market slips into a long period of lower returns.

"From a perspective of five to 10 years, I do think returns are going to be appreciably lower than what their historical average have been, and perhaps lower than people have been counting on," said Albert Brenner, who heads the asset allocation strategy team at People's United Bank Wealth Management. "I think we're looking for equity returns in the U.S. market to be under 6 percent [including dividends] ... a long distance from where they've been historically."

Market performance in the last six years has been rather extraordinary; the S&P 500 has risen an average of 17 percent a year. And in the very long run (going back to 1928) stocks have risen more than 11 percent in the average year, according to data from NYU finance professor Aswath Damodaran.

But some market participants say these sorts of returns are only sustainable for so long. For instance, most of the impressive equity returns have been logged while the U.S. economy has been on the upswing, growing something like 3 percent a year. But with growth stagnant in recent recent years, those sorts of GDP figures are beginning to feel antiquated.

Inflation, too, has been quiescent. Traditionally, market participants have expected equity growth to be generally predicted by real GDP expansion plus the inflation rate; this would have projected that stocks rise less than 5 percent in 2014. Instead they rose more than 13 percent.

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If growth doesn't take off, then, stocks may have another issue: They have outpaced the gains they "should have" logged based on the economy alone, based on the promise that growth would strengthen in the years ahead. If the U.S. becomes bogged down by global problems, that promise could prove an empty one, putting further pressure on stocks.

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In the words of Rareview Macro's Neil Azous, the current "debate" among investors is whether "a whole new U.S. equity regime" is upon us.

So what could this regime bring?

Some, like Boris Schlossberg of BK Asset Management, point to the example of Japan, which fell into secular economic stagnation, and saw its stocks stagnate as well. That's surely an unwelcome prospect for the millions of Americans who depend on a generally rising market for their income, future fiscal needs, or eventual retirement.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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