The past decade has been an extraordinary time for financial markets.
Let's look back on five things that defined investing during the 2010s and some lessons
we learned along the way.
# 1: The Longest Bull Market in History
The 2010s was a phenomenal decade for the stock market.
The S&P 500 gained roughly 180%, nearly tripling in value.
According to Bloomberg, U.S.
Corporate earnings grew more than 150%.
U.S.
Companies executed a record number of stock buybacks, and pro-growth fiscal policy helped
keep fears at bay.
But perhaps nothing supported the markets more than the Federal Reserve.
The Fed kept interest rates near or below zero in the wake of the financial crisis and
began Quantitative Easing the program of buying mortgage-backed securities and U.S.
Treasuries.
QE incentivized growth but also caused bond prices to rise, thus lowering yields.
Consequently, investors poured money into stocks.
While the Fed's actions supported stock prices in the short term, it may be years
before the long-term effects of low interest rates and QE are realized.
And while many tried to pick the top and short the rally, those who bought and held were
generally rewarded.
Bottom line, the lesson for investors this decade was don't fight the Fed.
#2: The Rise of FAANG Stocks
During the decade, markets were led by the FAANGs
Facebook, Apple, Amazon, Netflix, and Alphabet, the parent company of Google.
In 2012, Facebook went public, in what was the largest tech IPO in history at the time.
Meanwhile, Apple continued to evolve, Amazon disrupted everything, Netflix changed television
forever, and Alphabet grew into a tech behemoth.
Collectively, these stocks gained, on average, 1600% since the start of the decade.
As FAANGs grew in value, so did their influence on the markets accounting for 12% of the
weighting in the S&P by the end of 2019.
In addition, FAANGs were added to many mutual funds and ETFs, meaning even if you don't
directly own FAANG stocks, there's a good chance you do via a mutual fund or ETF.
Now as FAANGs face headwinds ranging from regulatory and privacy concerns to competition
and trade wars, investors should review their holdings to
ensure their allocation matches their risk appetite for these stocks.
#3: Bubbles
A financial bubble is a significant increase in an asset's price without an increase
in its true value.
Throughout the last decade, sharp moves in prices for some assets showed signs of this
kind of speculation.
Beginning in 2010, gold's price doubled and silver's tripled on fears of hyperinflation.
But as the dollar strengthened and the U.S. economy recovered, investors dumped metals
and flocked to equities.
Perhaps no bubble was bigger than bitcoin.
In 2017, bitcoin's price skyrocketed.
But the move was unsustainable, and the price crashed more than 80%.
Other assets have gone through moments of steep price increases, including pot stocks,
corporate bonds, and tech unicorns that struggled after going public.
Investors should tread carefully with these groups, because while history doesn't necessarily
repeat, it tends to rhyme.
#4: Unexpected Events
Few decades in stock market history were as smooth as the last one, but that doesn't
mean there wasn't unexpected turbulence along the way.
Political surprises, natural disasters, and a crash in oil prices took markets for a ride,
but perhaps nothing caught investors more off-guard than the flash crash.
On May 6, 2010, markets dropped suddenly, and precipitously for no apparent reason.
Lasting only 36 minutes, prices immediately recovered.
Initial reports blamed a fat finger trade error, but after investigations,
the crash was attributed to a futures trader in London who pled guilty for attempting to
"spoof the market" by quickly buying and selling hundreds of e-mini S&P 500 futures contracts.
While sudden crashes are almost impossible to predict, investors can prepare for them
by managing risk in their account and understanding ways to protect their portfolio through hedging
and proper order management.
Investors with a plan can attempt to weather these brief storms while keeping their eyes
open for opportunities as a result of them.
#5: The Return of Volatility
Throughout the decade, the Fed provided stability to the markets.
But as the Fed started raising interest rates and unwinding QE, volatility returned.
In February 2018, the S&P 500 dropped 10% on fears the Fed would raise interest rates
quicker than expected.
Eight months later, the 10-year yield spiked, and the S&P 500 dropped nearly 20%.
In 2019, the trade war kept markets on edge, and economic growth seemed to be slowing.
In August, the yield curve inverted for the first time since 2007.
This ominous signal has occurred one to two years prior to each of the past nine U.S.
recessions.
Although unemployment remained low and the stock market hit new highs through the end
of 2019, some still fear a recession may be looming.
So What's Next?
As the next decade approaches, investors are facing a number of unknowns including the
2020 Presidential election outcome, trade negotiations, and the potential end to low
interest rates and QE.
Major shifts in population demographics will likely affect sectors like Health Care, new
technologies like 5G could revolutionize the world, and issues like climate change, student
loan debt, and growing income inequality may pose long-term challenges to the economy.
Ultimately, investors may need to plan for lower returns than they received in the previous
decade, and in the face of uncertainty, investors should think carefully about how much money
to devote to short-term opportunities, while setting aside sufficient capital to invest
for the next 10 years and beyond.
Thanks everyone for watching.
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