“Adjusted for risk—or, more precisely, the volatility stock investors had to bear—gains in the S&P 500 index since Dec. 31, 2009, are poised to be the highest of any decade since at least the 1950s.” as outlined in a recent Bloomberg article, The Bull Market Almost No One Saw Coming.
Who would had thought that back in 2009?
As the Bloomberg article highlights, it has been a relatively smooth ride of late; equity market volatility has fallen in line with the sharp decline in interest rates over the last ten years.
Also assisting the smoother ride in US equity markets has been the lower volatility in US economic activity. The US economy has expanded by 1.6% to 2.9% in each of the previous nine years, a similar level of economic activity is expected in 2019. According to Bloomberg, based on standard deviation, that’s the smallest fluctuation over any 10-year stretch in data going back to 1930.
In fact, the 2010s were the first decade without a bear market, defined as a 20% drop from any peak.
For the record, US equities:
- experienced six separate 10% corrections over the 2010s (to date!); and
- In total have returned 249% in the past 10 years, about 1.2 times the historical average.
The US is amid the longest bull market ever (longest period in history without a bear market).
These gains have come when least expected.
They also follow a -20% decline over the previous decade (2000 – 2009). Which includes a -52% decline of the Great Recessions (Global Financial Crisis (GFC) – measured over the period October 2007 – February 2009. As at October 2007 the S&P 500 Index had only climbed 11% since the beginning of the decade.
How Good has it been?
As Bloomberg note, based on the Sharpe ratio, which tracks the performance of equity markets relative to Government Bonds, adjusted for the volatility of equity markets, the current Sharpe Ratio of the S&P500 is the best among any decade since at least Dwight Eisenhower’s presidency.
The last decade has not been all plain sailing and includes the following market events: May 2010 flash crash, Europe’s sovereign debt crisis in 2011 and ’12, and China’s currency devaluation in 2015.
A previous Post covered these market declines: Equity Market Declines in Perspective
More recently global markets have had to endure an ongoing trade and technology dispute between the US and China.
Central Bank actions, including the lowering of interest rates and quantitative easing (i.e. buying of market securities, mainly fixed income) has helped ease markets anxiety. This is reflected in the decline of market volatility indices, such as the VIX Index.
What does the next decade look like?
The sharemarket and economy are linked.
Generally a bear market (i.e. 20% or more fall in value) does not occur without a recession (a recession is often defined as two consecutive quarters of negative economic growth).
Currently there are no excesses within the US economy, that normally precede a recession e.g. elevate inflation, excessive house prices, and high household debt levels.
This would tend to indicate that global equity markets can move higher.
Nevertheless, US equity market valuations are high, as are those of global Fixed Income markets. This environment has resulted in many reporting the death of the traditional Balanced Portfolio (60% listed equities / 40% fixed income).
There are growing expectations that returns over the next decade will be lower than those experienced over the last ten years, as highlight in a previous Post: Low Return Environment Forecasted.
That Post has the following Table, GMO’s expected 7 year returns as at 31 July 2019. They estimated the real returns (returns after 2.2% inflation) for the following asset classes as follows:
|Share Markets||Annual Real Return Forecasts|
|US Large Capitalised Shares||-3.7%|
|Fixed Income Markets|
|US Fixed Income||-1.7%|
|International Fixed Income Hedged||-3.7%|
As GMO highlight, these are forward looking based on their reasonable beliefs and they are no guarantee of future performance. Actual results may differ materially from those anticipated in forward looking statements.
It is very rare for decade of strong returns to be followed by a similar like decade. Only time will tell.
Nevertheless, there is little doubt that a challenging investment environment is likely in the not too distant future. This Post outlines how to prepare and consider investing for such a challenging environment: Investing in a Challenging Investment Environment.
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For a historical perspective of previous sharemarket corrections and bear markets please see my previous Post: History of Sharemarket corrections – An Anatomy of equity market corrections
Meanwhile, this Post, Recessions, Inverted Yield Curves and Sharemarket Returns, outlines the inter-play between the economic cycle and sharemarket returns.
Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.