This Might Be The 'Most Important Investment Decision Over The Next 10 Years'

For more than a month, Bank of America’s long-term valuation model has been projecting 0% to slightly negative returns for SPDR S&P 500 ETF Trust (NYSE: SPY) investors over the next decade.

On Friday, analyst Savita Subramanian said reinvesting dividends could be the most important move investors make to potentially avoid 10 years of lost returns.

Lost Decade? Subramanian said the recent stock market pullback has BofA’s 10-year model back at around 0% annually after its projections dipped into negative territory in early September. However, she said the S&P 500 is still statistically expensive according to at least 15 different valuation metrics.

“The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6000 in 2031, assuming [long-term] avg. growth/payouts,” Subramanian wrote in a note.

Related Link: 4 Catalysts That Could Send The Stock Market Higher Or Lower From Here

How To Play It: While Bank of America's projections doesn’t bode well for the S&P 500 as a whole, the long-term model is more bearish on certain market sectors than others.

The model’s top sector for the fourth month in a row is energy, where Subramanian said investors can find inflation-protected yield. Meanwhile, sectors such as consumer discretionary, which is negatively impacted by rising oil, gas and wages, are looking particularly vulnerable. In addition, these sectors are particularly vulnerable to thin inventories, supply chain disruptions and rising costs, Subramanian said.

Traders who want to pair trade Bank of America’s thesis should consider going long the Energy Select Sector SPDR Fund (NYSE: XLE) and short the Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY).

Benzinga’s Take: The S&P 500’s current dividend yield of 1.3% is historically low, but even a rate that low can generate meaningful returns over time. If the stock market and economy stagnate over the next decade, investors can expect that 1.3% dividend yield to grow more in line with the S&P 500’s historical mean dividend yield of 4.3% by 2031.

Photo: John Schnobrich via Unsplash