January 2020
Imagine you had a time machine and you were able to go back 10 years. You decide to travel back to early January 2010 and you are reading a review of the financial markets. Investors have been on a roller coaster over the past three years, living through the stress of the GFC (global financial crisis) and the accompanying severe market downturn of 2008–2009. Subsequently, investors experienced the recovery that began in March 2009 and is still going strong in January 2010.
Investors who - against the advice of market pundits and against their own fears - rode out the market’s slide are finally beginning to be rewarded after the Lehmann disaster. But the rebound is now already 10 months old in January 2010, and markets still have a long way to go to reach their previous pre-Lehman highs. Opinions are mixed about what might unfold in the coming twelve months. A December 2009 headline in the Wall Street Journal underscored the uncertainty: “Bull Market Shows Signs of Aging.” The publication pointed out that, although stocks have rallied and indices are on the rise, worries are mounting in some quarters that the market is running out of steam.
In January 2010, investors were wondering whether to stick with their investment plans or to move into cash and wait for more evidence that the markets have indeed recovered. Now, fast forward to today and consider what the global equity markets delivered to investors who stayed the course.
On a total return basis, global stocks more than doubled in value from 2010–2019.
The MSCI All Country World IMI Index, which includes large and small-cap stocks in developed and emerging markets, had a 10-year annualized return of 8.91%. From a growth-of-wealth standpoint, $10,000 invested in the stocks in the index at the beginning of 2010 would have grown to $23,473 by December 2019.
While hindsight is 20/20 and while positive annual market returns were realized during most of the past decade, investors had to process continuous uncertainty arising from a host of events in the past ten years, including an unprecedented US credit rating downgrade, sovereign debt problems in Southern European countries, negative interest rates, flattening yield curves, the unexpected result of the Brexit vote, Donald Trump's unforeseen victory in the 2016 US presidential election, recessions in Europe and Japan, slowing growth in China, trade wars between the US and China, and geopolitical turmoil in the Middle East, to name a few.
The decade also brought disruptive technological advances in electronic commerce and cloud computing, the global embrace of the smartphone and social media, increased automation and enhanced artificial intelligence, and new products like electric cars and early versions of self‑driving automobiles.
Looking back, you could conclude that the decade had its share of uncertainty—just like the decades before. But overall, the US equity market experienced moderate volatility compared with previous decades. You can clearly see this in the graphic below by looking at returns and standard deviation, where a higher standard deviation reflects wider market swings during that decade. We use the S&P 500 index in the picture below since it is the index with the longest data series going back to 1930.
In our upcoming part 2 of the market review for this past decade, we will address all of the areas which you as an investor should adhere to and the lessons learned regarding your own portfolio structure going forward.