Investment Review for Fourth Quarter 2019

A decade of economic growth.

The 2010s proved to be a decade of continuous economic growth. The U.S. experienced growth in each of the past 10 calendar years, a phenomenon not seen since the 1960s. While the pace was not record-setting, annual economic growth averaged 2.3% during the decade.

In addition, the current expansion, that began in mid-2009 is currently in its 127th month. As such, this is now the longest U.S. expansion since record keeping began in the mid-1800s. To put it into perspective, since World War II, the average expansion has lasted roughly 58 months.

Major asset class returns

Jobs.

Labor markets improved dramatically over the past 10 years as businesses recovered from the Great Recession. The official unemployment rate fell from 9.9% to 3.5%. Even the more encompassing unemployment measurement, which includes discouraged workers and involuntary part-time workers, fell over 10%. At the same time, the number of job openings rose from under 2.5 million to over 7 million.

With fewer people looking for work and more positions to fill, employers have increased wages. In turn, higher wages and more people working has boosted median household income from below $50,000 per year to over $60,000.

Domestic vs. foreign economic growth.

When compared to other parts of the world, the U.S. economy grew roughly 25% over the past decade, outpacing the 18% growth of foreign developed economies, but falling short of the astonishing 62% achieved in emerging economies. As a result, emerging economies are now responsible for 40% (up from 30% 10 years ago) of the annual goods and services produced worldwide. The remaining production is split between the U.S. at 27% and foreign developed economies at 34%.

Stock market returns.

Despite relatively modest economic growth, U.S. stock prices soared over the past 10 years, gaining 253% when measured by the S&P 500 index. Foreign stocks did not fare quite as well, increasing 99% for developed country stocks and 83% for emerging markets.

The outsized returns of U.S. stocks led to a dramatic increase in the total market value of the publicly traded shares of stock, which grew from 42% of the global investible universe to over 55%. Interestingly, the total value of U.S. stocks now represents 55% of the investible universe, when as a country we only produce 27% of the world's goods and services.

A decade of cheap financing.

One contributor to stock market performance was the availability of cheap financing. At the start of the decade interest rates were near zero and remained at that level for nearly six years. The Federal Reserve increased interest rates for the first time in December of 2015 and did so several additional times between 2016 and 2018. However, following some turbulence in the financial markets in late 2018, the Federal Reserve reversed course and began lowering interest rates once again in 2019 to calm financial markets and prolong the economic expansion.

With cheap money readily available, many hoped corporations would increase spending on research and development, modernizing facilities, or expanding operations. While some companies did spend money in that fashion, many more simply increased borrowings to buy back their own stock. In fact, large U.S. corporations spent over $5 trillion buying back shares of their own stock.

Debt expansion.

Over the past 10 years, U.S. business debt increased significantly from $10 to $16 trillion. In contrast, U.S. household debt increased only modestly, from $14 to $16 trillion. The largest component of household debt continued to be mortgages (66%), while the second biggest component became student debt (10%).

Unfortunately, student debt has grown from $232 billion at the beginning of the decade to $1.3 trillion today. With the amount of student debt more than quadrupling, it is now not only a financial problem, but a political problem we are sure to hear more about in the coming months.