Decade in Review

Markus Muhs - Jan 08, 2020
I’ve been slow this year to get my usual annual market review out, and the more I read other people’s market reviews, the harder it gets to write something original here.

Who cares about the change in value of various asset classes during one revolution around the sun anyway? I ask that question every year, and really, for people saving for their retirement and even people who are retired and drawing income from their nest egg over the next few decades, it shouldn’t. What might be somewhat relevant is how they changed over the past decade and what we learned along the way.



First, I do want to touch on 2019 and what a weird year it was, especially when you compare it with 2018. Over the past two calendar years the S&P 500 did a very respectable 12.12% annually in total return. What was weird was that the first year (2018) was when most of the earnings growth happened among S&P 500 constituents, growing 18% from the year prior, but that year saw the S&P return -4.4% (total return including dividends, in USD). In 2019 corporate earnings actually shrunk slightly, yet we saw the market return 31.5% including dividends (these two annual total returns constitute the 12.12% CAGR mentioned earlier).

Ultimately, what we can take from the above is simply what we’ve come to know over the years. Markets don’t usually make sense and this is precisely why market timing is a complete fool’s errand. Buying the markets because fundamentals were excellent in 2018? Stay in cash through 2019 because fundamentals are deteriorating? You’re now trailing the index by 35%; hope you’re at least saving money on fees. Essentially what I'm saying is don't read or act on market projections like they mean a single thing about what the markets will actually do. Even if you're bang on in terms of assessing or predicting economic fundamentals, the markets can be completely unhinged of these.

Anyway, I wanted to take the occasion of the “turn of the decade” to take a more relevant look at somewhat  longer term results in the various asset classes, as well what happened in the past decade and how might it have affected the markets, or not?

I’m writing this blog post while watching my Patriots lose to the Titans in the AFC Wildcard game. Like any Pats fan this year, I have to take the decade as a win, if this year will just have to be one of those off-years when they don't make it to the Super Bowl. I can say that for the decade the Pats have a 125-35 record and three Super Bowls championships. Though I doubt Brady and Belichick will be around long enough, there are 9 more tries to keep up the 3 Super Bowl wins per decade pace!

The table above lists the valuations of various asset classes as of Dec 31st, 2009 and what they closed the decade off at Dec 31st, 2019. In addition to simple current end value divided by start value calculations, I was also able to get compound annual growth rates (CAGR) of the major North American indices, in $CAD (most relevant to us Canadian investors), thanks to Morningstar. Rather than doing the math by hand for the numerous international indices, I posted 10 year annualized numbers, in $CAD, for an international developed market index ETF (even though I wrote "developed world" on the table, I mean EAFE: Europe, Australia, Fare East) and an emerging markets ETF. Suffice it to say, the 2010s were all about the U.S. bouncing back from the Great Financial Crisis, while the rest of us just had so-so returns, barely compensatory for the terrible decade we all had prior.

I’d like to first direct attention to the currencies in the middle of the table, as these affect all else in the table, since the various international indices are reported in their local currencies. Clearly, the observation here is that the U.S. dollar got a lot stronger over the past decade, and for good reason (the sole exception being the Chinese yuan, which had a long overdue move up). As Canadians, we saw the decline in the CAD amplify returns even more on U.S. investments, and on the flip side U.S. investors got punished on their international investments.

The USD is the only major world currency in which anyone can get a decent yield from treasury securities (negative rates in Europe aren’t really a new phenomenon; rates have been rock bottom in Europe and Japan for most of the decade). The relative strength of the U.S. economy contributes to these higher yields, as the Fed actually was able to raise rates while Europe continued cutting. A U.S. economy that has gone from the biggest net oil importer to being on the verge of net exporting, and an overall global economy that sees massive amounts of cash flowing into the U.S. tech titans (now dominating the top 10 largest publicly traded companies in the world), from consumers and investors, also helps. It’s pretty profound though when you see that in just 10 years the mighty greenback has appreciated around 20% against every major currency (note too that the increase in the USD/JPY number reflects a weakening of the yen).



A stronger USD going into the 2020s does have its pros and cons though for the U.S. economy. Inflation should remain muted, as the U.S. is an overall huge net importer of consumer goods, and the strong greenback is a boon to the U.S. consumer in keeping the costs of imported goods low. A few tariffs here and there might throw a wrench in it, but not to the point that higher inflation might force the Fed to start hiking rates again. On the other hand, the biggest companies in the S&P 500 depend on exporting their goods and services and that stronger USD does cut into their bottom lines, as revenues in foreign currencies come up a bit short on their USD denominated 10-Ks (annual financial reports). Unlike Canada though, the U.S. economy doesn’t rely on digging up basic commodities and selling them at whatever the world wants to pay; they’re a high value add economy. If the next iPhone is going to cost $1100CAD instead of $1000, or our Netflix or Disney+ subscriptions go up a few bucks per month, we’re probably still going to pay.

Lower commodity prices in the table above (oil and base metals) help explain the underperfomance of both Canada and the emerging markets over the decade. Take into account that the above 10 year declines have a start point after the financial crisis, thus don't encapsulate the full 2008 to present decline; it's been a really tough 10 years for investors in those areas. While it presents some upside opportunity, the real plus is that I don't think you can get any more of an economic nirvana than being 10+ years into an expansion and still have rock bottom commodity prices. Those commodity prices going up, while a boon to Canada, will be the eventual death knell for this economic expansion.

A much simpler version of the "drawdown table" from my usual monthly update shows just on the S&P 500 how many actual drawdowns we saw. The 2010s were an actual normal decade; maybe a tad on the low volatility side. Note that those numbers of drawdowns on my table are likely a bit higher than what many others are reporting because I will not consider a 19.8% drawdown (which is literally what we hit both in 2011 and in 2018) to be only in the 10% or higher column. Same goes for a few major drawdowns that stopped in the high 9s.

In terms of what to expect from the 2020s...



Myself, I choose not to be a prognosticator. Highly educated and evidence-based projections can be made of the markets heading either way in the 2020s.

On one hand someone can point to high valuations in U.S. stocks, in particular by the Shiller CAPE ratio, which gets far far more attention than it deserves. Past presedence is that whenever the CAPE is as high as it is now, the projected return for the following ten years is below average, close to zero (see the 10 years following its 1968 and 2000 peaks) however it's really terrible at predicting the short-term, as a ratio in excess of 25 over the past 5 years would have discouraged participation in investing in U.S. stocks. U.S. stocks are overvalued by almost every other ratio as well, including PEG (price equity over growth) and price/book. 

On the other hand, if you measured stock market performance over the past 20 years, the annualized total return (including dividends) is only 6%. U.S. stocks have trended below their long-term average for the past 20 years, stocks in the rest of the world even more so. We're not at some massive peak of over-performance. The economy is not super-heated and we haven't reached the "euphoria" upon which Sir John Templeton's famous quote said that markets tend to die on.



The message I want to impart as I wrap up this review is: we don't have a freakin' clue what exactly the markets will do over the next decade. And if we knew the number, let's say it's 8% annually, those returns will come in completely unpredictable spurts (just like the book ends of 2019, most of 2017, end of 2013...). We have no idea when the expected 2 or 3 (or more? or none?) bear markets will occur. Along the way, countless investors will no doubt do incredibly stupid things with their money, like investing aggressively at the end of the up ramps, expecting strong markets to continue (all the news at those times will be rosy and will indicate that the markets will continue to do well and that you're an idiot for not buying stocks). We'll avoid the markets, or worse, sell our long-term investments out of fear during the 2 or 3 bear markets to come because all the news will indicate all hope is lost and that the (thus far) uninterrupted advancement in economic and human progress might come to an end.

That is... unless we make the following resolutions for the next decade, based on our learnings from the last:

  • We will not check our investment account/statements more than is absolutely necessary.
  • We will not invest any money without at least a basic, rudimentary financial plan.
  • We will invest our long-term (10+ year) assets primarily in the great publicly traded companies of the world, or funds thereof.
  • We will not invest 100% of the money that we or our families might need access to during the 2020s in stocks (allocate some to safer stuff like bonds).
  • We will not buy into fads. When everyone is talking about investing in X, we will run for the hills if we have to in order to avoid investing in X. If we happen to already own X, we'll sell it to the highest bidder.
  • For our long term assets, we will treat every decline in the markets as an opportunity to buy more at cheaper prices. Every decline, no matter how scary the newspaper headlines are.
  • Whenever the markets are on a tear, we'll review our portfolio allocation as it pertains to our goals, rebalance, and re-allocate that money we need in the short term to cash.
  • We will cancel the financial noise networks off our cable packages, if cable even remains a thing in the 2020s.
  • We will subscribe to the Muhs Wealth Partners eNewsletter.


Wishing everyone investing success over the next decade, and above all good health so that we can continue to enjoy life—and our money—into the 2030s!


Markus Muhs / CFP, CIM 


If you're interested in reading my market reviews from past years (a warning that due to their age some of the links might not work and due to changes in my website, some of the formatting might be odd):