With the close of a calendar decade, it’s worth-while to reflect on the previous ten investing years and think about what the next set might bring. By any measure, this was a fantastic stretch for stocks, with major benchmarks posting outsized returns as they finally broke free from an agonizing cycle that had provided investors with volatility and not much else. While falling interest rates and recovering earnings were propelling markets higher, however, many were skeptical of the rise, increasingly convinced that stocks were levitating on borrowed time.
To be sure, it’s hard to make the case that conditions are ideal to start the next decade: stocks are expensive, economies are tilting toward contraction, and international relations are incendiary, at best. In fact, by summer, NorthAmerica will be mired in recession and within a year, the US will mount a full-scale war effort in the Middle East. If that’s not discouraging enough, a series of regional financial crises will erupt soon after and, at about the same time, the dramatic collapse of major investment fund will rattle markets so thoroughly that the Federal Reserve Bank of New York will be forced to intervene to prevent a wider contagion.
Wait, what? How are we willing to make such bold and unequivocal predictions about everything from the geopolitical environment to the economy and the financial system? We’re able to do so because the words above aren’t predictions at all – rather, they’re what a clairvoyant would have written in a market review and forecast at the beginning of 1990. Imagine if an investor, having just accumulated a prodigious 10-year gain, but still mindful of the market’s single-day plunge of 22% less than three years earlier, had been presented with a crystal ball glimpse of what was about to unfold. It’s almost certain that he or she would have headed straight for the investing sidelines, happy to book gains and let others brave the coming tumult. Unfortunately, as the table below illustrates, this seemingly prudent tack would have missed the most profitable half of a 20-year secular bull market.
As we peruse the decade retrospectives that are now in abundance with the close of the 2010’s, a couple of things stand out. First, the financially tilted compositions we’ve read in-variably use terms like “historic” and “unprecedented” to describe the recent market performance. Given that the figures above are widely available, we have to assume either that these writers can’t be bothered to make even the slightest research effort, or that they view actual history as little more than a neglectable irritant to the narrative they prefer. Second, many of the editorials have taken a decidedly negative position on the state of the world and what’s transpired over the past 10 years. Writers lament the surge in political polarization and Trump; they fret about nationalism, Brexit, wilting global institutions, and trump; they warn us about digital privacy, the rise of robots, and the unintended consequences of artificial intelligence. And of course, the despair over the environment ... and Trump. We may be living in a uniquely perilous time, but it seems just as likely that a bombardment of gloom from a 24-hour news stream and a political faction increasingly willing to pander to pessimism has simply amplified our sensitivity to such information. Aside from an incomparable and exasperating US President (who voters may remove from office in a little over 11 months), however, it’s difficult to discern a marked difference between the worries of today and those of 30 years ago:
Today we’re vexed by Kim Jong Un; in 1990 it was Gaddafi, Noriega, and Hussein. Today we worry about conflict (and proxy wars) in Ukraine, Syria, Yemen, and elsewhere; then we had genocide in Bosnia and Rwanda, a disastrous US military operation in Somalia, and the Gulf War. We also held our collective breath as the world’s penultimate nuclear superpower disintegrated before our eyes. Today we live in the shadow of the subprime crisis; then the Savings & Loan collapse almost brought down the US financial system. Now we’re haunted by the crash of 2008/09; then it was the crash of ’87. Today we worry that a trade skirmish will bluntChina’s contribution to the global economy; three decades ago, we somehow managed to get by with almost no input at all from the middle kingdom (hard to believe, but in 1990, China’s economy was smaller than Canada's about a third). Back then, human ingenuity and determination solved the scourge of acid rain; maybe, just maybe, our innate drive to improve, invent, and discover will also beat back CO2.
Though we’re regularly made to feel that nothing is going right in the world, it can be credibly argued that we’ve just completed one of the greatest decades for humanity. According to the UN, extreme poverty has fallen by more than half since 2010 and child mortality by a third. Global life expectancy climbed from 69.5 years to 72.6 years during the period and at least one form of personal freedom rose as well, as the proportion of the earth's population living in countries where same-sex relationships are illegal dropped from 40% to 27%. Literacy rates are at their highest in history and never have as many girls had access to education as they do now. More than a quarter of the world’s wealth was created in the last decade and, while it’s a fair argument that a disproportionate share of it accrued to society's upper echelon, it’s also true that the globe's poorest citizens are significantly better off than they were 10 years ago.
So what does all of this mean for markets and, more importantly, for your portfolio in the new decade? Everything in the long run, but probably very little in the short term. When more of the world’s population is lifted toward prosperity and gains liberty it’s not only heartening, it creates new markets and opportunities for the nimble and innovative companies we target in our equity mandates. Of course, markets are fickle and can detour even the best-laid investment plan at any moment without any explanation, as was the case in the final quarter of 2018. Even though optimism has somehow become an unfashionable sentiment in recent years, however, we’ll continue to put our faith and dollars behind the human spirit. To paraphrase the words of J.P. Morgan more than a century ago “the man who is a bear on the free world will always go broke”.