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A decade in review

Tom Stevenson

Tom Stevenson - Investment Director

This article first appeared in the Telegraph

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What a difference a year makes. 12 months ago, we were fretting about the impact of trade tensions on global economic growth and what we expected to be a continuing interest rate squeeze by the Federal Reserve. That unhelpful combination had driven markets sharply lower in the final three months of 2018 and we were looking back on a disappointing year for investors.

Fast forward to today, and we are basking in the second-best year for shares since the financial crisis. Wall Street, once again the leader among developed markets, has risen by close to 30% Even in the UK, where sentiment has endured a political rollercoaster and the economy has been held back by Brexit, investors have enjoyed a 13% increase for the FTSE 100.

Everything that looked bad in December 2018 has flipped a year later to push markets to, in some cases, fresh all-time highs. The most important U-turn was in monetary policy, with the Fed’s pivot back to an easing bias during the first half of the year encouraging many other central banks around the world to follow suit. Less important, but helpful, was the partial retreat by both the US and China from their two-year trade dispute. Donald Trump has turned his attention to next year’s Presidential election, and he knows there will be no better distraction from his imminent impeachment trial than a buoyant stock market.

The third key factor in 2019’s remarkable rally was its subdued starting point. One of the key determinants of investment performance is the price you pay at the outset. Last Christmas the sell-off had clearly gone too far. As I said in my January Investment Outlook, ‘picking up blue-chip stocks with a near-5% yield will probably look obvious in a few years’ time’. Although I didn’t know it then, I was far too cautious about the timing of the recovery.

One of the ironies of the last two years (and the reason why timing the market is so difficult) is the fact that strong earnings growth in 2018 was rewarded by falling share prices while this year’s disappointing profits growth has seen markets soar. Stock markets never respond to today’s headlines, but rather look forward to tomorrow’s. This year’s rally has been fuelled by a re-assessment of the outlook, which of course puts the pressure back on companies to deliver earnings growth in 2020. I’ll return to that challenge in my first column after the New Year.

So, it’s been a great year to be fully invested. As we close in on the end of 2019, we can also look back on a remarkable decade in the markets. The end of 2009 was not quite the bottom of the cycle, but we were only a few months into the recovery from the financial crisis. The last ten years have seen double-digit annualised gains for a wide range of asset classes and geographies, underscoring once again the pivotal role played by monetary policy in investment markets. Again, with interest rates at historically low levels, that points to thinner pickings in future, but not necessarily a reversal.

Since December 2009, the US stock market has risen by more than 13% a year which, thanks to the power of compounding, has delivered an impressive total return for anyone brave or lucky enough to see the opportunity for the phoenix to rise from the ashes of the credit crunch. Wall Street has risen five-fold since March 2009, ensuring the last decade will feature in any history of the market’s great bull runs. The past ten years have been an amazing illustration of the adage that bull markets climb a wall of worry.

You have not required much skill or selectivity as an investor in recent years. Just turning up has been enough. The equivalent annualised returns for high-yield bonds, emerging market debt, government bonds and real estate are: 12.2%, 12.0%, 7.8% and 7.2% respectively. Cash has obviously been a disappointment in an environment of persistently low interest rates (a painful outcome for nervous investors who have stayed on the side-lines). Of the main asset classes, only commodities have failed to give investors a positive total return over the period.

The end of a decade is an arbitrary moment at which to reassess the outlook, but it is notable how often the switch from a 9 to a zero has marked a turning point in investors’ fortunes. I started writing about markets in the late 1980s, just in time to catch the top of the Japanese stock and property bubble. The Nikkei 225 index in Tokyo hit a peak of 38,916 on New Year’s Eve 1989, a level it has never recovered in the 30 years since.

Ten years later, the FTSE 100 reached 6,930 on the last day of 1999. It would be February 2015 before the UK’s benchmark rose above that level for the first time. Global stocks, driven by Wall Street, peaked less than three months later. As with the top of the Japanese market a decade earlier, the bursting of the dot.com bubble was accompanied by exuberant sentiment and the belief that the world had changed for good.

So, if the 11-year old bull market does not run out of steam at some point around the turn of this decade, it will be the exception that proves the rule. At the risk of giving away my New Year conclusion, I would say that the absence of either the optimism of 1989 and 1999 or the despondency of 2009 is the key to understanding where markets head at the end of 2019.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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