The decade has ended with the stock market capping off an extraordinary 10-year stretch. This may have you thinking either "all good things must come to an end" or "let the good times roll". In our view, both are valid. You may have heard some people saying, “This time it’s different” – but history has taught us that those can be dangerous words when it comes to the markets. What does this past decade tell us about the next one?
Let’s start with a quick recap. This decade started off from the ashes of the financial crisis and finished with a strong rally to record highs. The 2010s were characterized by a slow-but-steady economy, record-low rates and above-average stock market returns.
The path wasn't smooth, however. This past year was a good example. December 2018 saw a sharp stock market selloff as recession fears rose. Flash forward to December 2019 and the market was ascending to new highs on economic optimism. We were optimistic coming into 2019, but the 31% stock market gain was the second-best year of the past decade, well exceeding our expectations.
So, what's behind this decade of good market news, and what might the future hold? We think there are three takeaways for investors as we head into the 20s.
First, a key reason for the market’s upside was the absence of an economic downturn. In fact, the TSX returned 95% over the last 10 years, while the S&P 500 returned an even-stronger 256%. And, 2019's 23% gain for the TSX made it the best year of the decade, while the S&P 500's 31% total return was the second-best year of a decade and the second-strongest finale to a decade since the 1930s.
This past decade was unique in that, while Canada did experience a brief technical recession, it was the only one on record with no U.S. recession, and only the second decade not to experience a bear market in the S&P 500, which is a drop of 20% or greater.
For perspective, over time, the market has experienced a bear market on average about once every 3.5 years. We don't think the coming decade will avoid a recession, but fortunately, we don't see one coming soon. Current economic and market conditions are starting us off on the right foot.
Broad trends in the economy and financial markets have shaped investment performance over the decades. This is why fundamental conditions, such as economic growth, corporate profits and interest rates, receive the heaviest weight in our market outlook.
In the 50s it was post-war industrialization that led to strong growth in the 60s. High inflation and stagnant growth of the 70s gave way to a rising consumer in the 80s. The 90s internet boom was followed by rising housing debt in the 2000s. The sluggish but persistent growth of the 2010s that was shaped by extraordinary central bank stimulus has provided a decent starting point for the 2020s. We don't expect a repeat of last decade, but the economy, corporate profits and interest rates are all in reasonably favourable positions.
Calendar years and decades provide tidy bookends for evaluation, but keep in mind that even though we’re moving from one decade to another, this is just a reference point in time. Market cycles and, more importantly, your investment goals don’t align neatly to 10-year windows.
Looking at rolling 10-year periods since 1940, the S&P 500 delivered a positive return for more than 97% of that time frame. In addition, a well-diversified portfolio including bonds, which have historically risen during stock market declines, helps to smooth the performance of portfolios over time.1
Timing matters, of course – but use the timeline of your financial goals, rather than the calendar, to gauge your performance.
With the strong gains in the market, now may be a good time to touch base with your advisor. As the market shifts over time, your investment mix may have shifted as well. Your Edward Jones financial advisor can review your financial goals and help ensure your portfolio aligns with your comfort with risk and required long-term return.
1 Source: Morningstar Direct, 1/1/1940-12/31/2019. Results may vary for a portfolio with similar holdings. The hypothetical portfolio consists of 100% stocks represented by the S&P 500 Total Return Index. Indexes are unmanaged and are not available for direct investment. Investing in stocks involves risk. The value of your shares will fluctuate, and you may lose principal. The prices of bonds can fluctuate, and an investor may lose principal value if the investment is sold prior to maturity.
Past performance of the markets is not a guarantee of how they will perform in the future. This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.