So, a new decade is upon us. How did investors fare in the 2010s?
The simple answer is that, in most cases, investors in government bonds, equities and property all did well (expressed in local currencies). Less easy to measure are such things as collectible art, fine jewelry, classic motor vehicles etc. but it appears they also performed well.
The price of gold rose by 37% over the 10 years (in US dollars), providing an annualized return of 3.2%. Better than bank interest and the rate of inflation. In the equity arena the key misses over 10 years were the southern European problem children – Spain, Portugal, Italy and Greece – although, in common with most markets, they performed well in 2019.
The MSCI developed markets ‘World’ price index appreciated at an annualized rate of 7.3% over the decade (measured in US dollars). If dividends are lumped in the annualized return mounts to around 10%. None too shabby.
The decade marked the recovery from the financial and economic crisis of 2007-9 and was accompanied by an unprecedented explosion in central bank balance sheets. Interest rates and bond yields fell, equity and property yields remained low and Wall Street rejoiced. In the US the 10-year government bond yield fell by 200 basis points over the decade – to the current level of around 1.9%. Some other countries were even more dramatic. In Australia, for example, the 10-year yield fell from 5.6% to the current level of around 1.3%. In several markets 10-year yields fell below zero.
The US equity market was the king performer among major equity markets in the decade. It was accompanied by a firm US dollar so that a 100% allocation to the S&P 500 index would have reaped generous rewards.
Measured over the 10 years to the end of 2019, the S&P 500, including dividends reinvested, achieved a compound annualized growth rate of around 13.6%. Inflation averaged a touch under 2% over the period so the real return to investors would have remained comfortably in double digits (source: Datastream). These are extraordinary numbers and approximately double the long-term average real return from the US market (50 or more years).
Real annualized GDP growth in the US over the last decade has amounted to around 2.2%. Thus, the stock market has moved much faster than the underlying economy.
So, what next? The best answer is always: “anything’s possible”, but that’s fairly unhelpful. Being realistic however, it is obvious that it is impossible to repeat the balance sheet expansion by central banks or the massive fall in bond yields. Interest rates are already on the floor, or hovering very close, and debt is stretched in all sectors of the economy.
Our view, therefore, is that investment returns in the next decade will, in most cases, struggle to match those of the last. If world GDP grinds along in low single figures that might be about it for market returns.
On that note we wish all our readers considerable success in picking the winners from the losers in 2020 and beyond.