Reflections on a Decade

4Q 2019

“Progress is invisible to most people because they don’t get their understanding of the world from numbers; they get it from headlines. Journalism by its very nature conceals progress, because it presents sudden events rather than gradual trends. Most things that happen suddenly are bad: a war, a shooting, an epidemic, a scandal, a financial collapse. Most things that are good consist either of nothing happening — like a nation that is free of war or famine — or things that happen gradually but compound over the years, such as declines in poverty, illiteracy and disease.”

 – Steven Pinker, Financial Times, December 27, 2019

After some markets hit bear market territory (defined as a drop of 20% or more from recent highs) in late 2018 and many pundits projecting a grim 2019, the S&P 500 defied expectations, finishing the year up 31.5% (including dividends). During the year, it put up 35 new record highs – in-line with the average over the past seven years. It was a year where storylines created pockets of volatility in every quarter, but markets overcame adversity and pushed higher. Brexit deadlines came, went and were postponed, while the European slowdown worsened. The trade war between the US and China improved, then worsened, then ended the year with a “Phase 1 agreement”. But importantly for stocks, the Federal Reserve demonstrated a willingness to relieve market worries by pausing interest rate hikes, and eventually lowering rates three times.

As we close out one decade on a high note and embark on a new one, we wanted to take a minute to reflect on what investors have experienced and provide some context. Our comments focus on the US equity market – particularly large stocks, as represented by the S&P 500 Index – as it is one of the most familiar stock market barometers to most US investors. The decade just finished (“the 2010s”) marked not only the longest US expansion but also the first one in US history without a recession. It saw the price of the S&P 500 increase 190% (or 11.2% per year) from December 31, 2009 to December 31, 2019. Including dividends, it returned 257% (or 13.6% per year). It was the fourth-best decade in history from a stock market performance perspective but would have ranked second-best if the beginning of the recovery from the Global Financial Crisis (March 10, 2009) could have waited just nine more months to begin (pushing the Crisis-low into the decade of the 2010s, rather than the 2000s). 

The above charts (click to enlarge) show annualized price returns of the S&P by decade for the last 150 years, as well as the percentage of time the US was in recession during those decades. What is most revealing is that three of the best four decades in history have occurred recently (since 1980). Perhaps it’s not so surprising when you compare what the economy looked like before then. Leading up to the 1940s, we experienced chronic cycles of booms and busts, characterized by rapid industrial expansions followed by bank panics. The next 40 years witnessed frequent military conflicts, as well as the Cold War, but also marked the post-war baby boom and the beginnings of a transition to a consumer-led and service-oriented economy, which would be instrumental in positioning our markets for growth in later periods. As more scientific approaches were employed in the areas of economics and finance, and better regulations were created for markets and accounting, the foundation of the US market stabilized dramatically compared to earlier decades. Domestic advances in technology of all industries keeps the US at the forefront of global innovation, extending our economic progress, which translates into higher corporate earnings and continues to fuel the stock market.

The next 150 years will undoubtedly look different. We’re not sure exactly how, but chances are it will be interspersed with continued advances in technology, new geopolitical conflicts, further improvements to economic theories and financial practices, and new (some better, some worse) government regulations. There will undoubtedly be bumps along the way – events which raise concerns and market volatility as expectations get overextended. But it is important to realize that an orderly and efficient market with appropriate investor protections will continue to be a benefit to all Americans, investors or not. 

As advisors, we aim to help investors create a plan to benefit from all the long-term positives of investment in the markets, while navigating intermediate-term risks and market opportunities. Within the sphere of investment management, we believe this means crafting an optimal risk-appropriate investment strategy to achieve a family’s goals, rebalancing into market volatility, harvesting losses where appropriate for use as a tax asset, staying globally diversified, and doing so in a simple, cost-effective, and tax-sensitive way. Outside of investment management, we believe it means minimizing lifetime tax brackets, safeguarding assets through estate planning, and ensuring proper insurance coverages are in place. We look forward to what 2020 brings, as well as the new decade, and we encourage investors to stay focused on the progress – both visible and invisible, compounding over years – in both US and foreign markets.