The 2010s were a banner decade for U.S. equities which steadily marched higher in value in the wake of greatest economic crisis the world had seen in eighty years.
Since the start of 2010 through last Friday’s close, the S&P 500 index
rose 11.1% annually, while the Dow Jones Industrial Average
gained 10.5% and the Nasdaq Composite index
14.5%. Cumulatively, the S&P 500 gained 186.2% over that time with a total return of 252.1%, according to FactSet.
That’s significantly better than the average ten-year price gain of 5.5%, for the Dow and S&P and 9.5 for the Nasdaq, according to Dow Jones Market Data.
The turn of the decade provides investors and analysts an occasion to take stock of the current bull market as well as the themes that have dominated equity markets in recent history and whether we can expect them to do so in the coming ten years.
Shrinking public markets
The 2010s was itself a decade of revolutionary technological change, as investors watched technology giants like Apple Inc.
, Facebook Inc.
and Netflix Inc
multiply in size along with the markets for smartphones, social media and online video streaming.
Looking at the ten largest companies by market capitalization in 2009 compared with 2019 illustrates how the U.S. economy continued to evolve away from one dominated by capital-intensive industries that manage resources in the physical world to a capital-light model that exists largely in a virtual reality.
In December of 2009, the largest company in the world was Exxon Mobil Corp.
, while Walmart Inc.
ranked fourth and Johnson & Johnson
seventh, according to FactSet data.
Ten years later, Exxon appears nowhere on the list, while Walmart and Johnson & Johnson rank ninth and tenth, respectively. The top four today are Apple Inc.
and Amazon.com Inc.
One major difference between Exxon and the largest companies today is capital intensity, as Exxon returned 5.65 times its total capital over the past year, according to FactSet, while Apple has a return on capital of 30.1 times.
In the 2010s, it became increasingly possible for businesses to rise to prominence with little more than computer code as an asset, lessening the need for large, upfront investment and contributing to a trend of the shrinking number of public companies. The Whishire 5000 total market index tracked 7,562 companies in 1998 and that number has fallen to 3,530 today.
There are many other drivers of this change, from the growing availability of private capital to increased regulation, but Baird’s Delwiche predicted the trend will lead to a greater investment in private equity by retail investors.
“You are getting some delay in how quickly companies go public and they are coming public with elevated valuations,” he said. “I think that creates a situation where private equity is a desired asset class.”
LIang Ying, senior investment consultant at Willis Towers Watson, argued in a recent report that regulators and investment managers must evolve to allow greater access to private equity by retail investors, while the Wall Street Journal reported that Vanguard Group is exploring ways to provide private equity funds to its clients.
During the 2010s, it paid for investors to not worry so much about risk management.
“In addition to it being a good decade for the U.S. stocks, it’s been a good decade for complacency,” said Delwiche. “If you put your money in the S&P 500 and forgot about it, you did really well.”
“What this has done is built into investor psyche that you just need to buy and hold,” he added. “But the next decade could challenge that view, whether its a question of stocks versus cash or diversification within equities.”
Elisa Mazen, portfolio manager at ClearBridge investments predicted in a recent outlook note that she expects the winning streak for U.S. equities relative to the rest of the world to end in the coming years.
“Valuations in the United Kingdom in Europe are attractive, particularly compared with US equities,” she said. “European stocks are at 50-year lows versus the US, which has represented a good entry point the last two times performance dispersions became this extreme.”
The Age of Government Interference
One driver of outstanding U.S. stock returns during the past decade has been the expanded role the Federal Reserve has played in markets, stimulating the U.S. economy after the 2008 financial crisis with near-zero interest rates and aggressive purchasing of U.S. government and mortgage bonds.
“A major story of the past decade, that will be an important question going forward in terms of whether it will continue, is that both fiscal and monetary policy has distorted markets and asset prices,” Michael Arone, chief investment strategist at State Street Global Advisors.
He attributed several trends in the stock market, like the outperformance of growth stocks versus value stocks, and the more highly correlated performance of stocks and bonds, to central bank intervention. Monetary authorities in the U.S. and abroad have also helped create a situation, where more than a decade into a bull market, equities are not behaving as they typically do late in an economic cycle.
“Late stage is defined as building inflation pressures, higher interest rates and leadership in cyclical sectors,” he said. “Value as an investing strategy hasn’t worked in decade, because (when interest rates are low) and the cost of capital is zero, companies that don’t earn a lot of money can grow really fast.”
It appears that active government involvement in the economy will only continue in the 2020s, with the United Nations projecting that by the end of next decade, globally there will be more people over the age of 65 than under the age of 5 for the first time in human history, putting pressure on governments to spend more on health care and retirement security.
These trends will also continue to impact financial markets, as “the ageing of the population is encouraging saving rather than spending, which is deflationary rather than inflationary,’ according to Haim Israel, equity strategist at Bank of America.
Israel said that the ageing of the population will impact investments in numerous ways, from shifting spending to focus more on older populations to larger markets for pharmaceutical companies. “We are entering an era where advances in technology will bring about a quantum leap in the quality and length of human lives,” he said. “Innovations in genomics, big data, and AI mean that living healthily past 100 years could be more common in the coming decades.
The increasing use of large data sets in the health care sector is one reason why Israel expects quantum computing to be the revolutionary invention of the 2020s.
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