December marked a strong finish to a big up year for stocks and a remarkable decade of a recession-free US economy and a bull market led by US growth stocks. The new year began in choppy fashion, with stocks finishing roughly flat in an abbreviated week. Stimulus from the central bank in China provided a boost, which was quickly erased by tensions following the US attack which killed one of Iran’s most powerful generals. Oil rose as investors speculated on both the response and future of the conflict between the US and Iran.

Weekly Returns

S&P 500: 3,258 (+0.6%)
FTSE All-World ex-US (VEU): (-0.3%)
US 10 Year Treasury Yield: 1.79% (-0.09)
Gold: $1,551 (+2.6%)
EUR/USD: $1.116 (-0.2%)

Major Events

• Tuesday – President Trump signaled the “phase one” trade deal would be signed on January 15.
• Tuesday – The Case-Shiller home index showed homes in major metropolitan areas rose 3.3% in October from a year ago.
• Thursday – The Bank of China cut reserve ratios, sparking a new year’s rally led by technology shares.
• Thursday – President Trump launched an airstrike killing one of the most powerful generals in Iran, prompting vows of retribution and stoking fears of escalation of violence.
• Friday – The ISM purchasing managers index fell to 47.2 in December, the worst reading since the recession.

Our Take

At the start of this decade the economy was still teetering from the subprime crisis and many questioned the validity of free markets and the survival of our financial system. Since then, US Stocks have nearly tripled and unemployment now sits at a 50-year low. Perhaps more impressive, the 2010’s were the first decade in which the US economy did not experience a recession.

Starting at a low point helped. The recession in 2008-2009 was ugly. Unemployment approached 10% and assets were cheap. While never certain, things were likely destined to get better. The other major factor was unprecedented support from central banks around the globe. In addition to lowering interest rates, the Fed pumped massive amounts of liquidity into the system. Its balance sheet swelled from less than $1 trillion in 2008 to over $4 trillion in 2014.

So, what does this mean for the next ten years? First, it is a good reminder that no matter how dark things may appear, growth is the natural state. We expect companies to continue to innovate and become more valuable. However, it is logical to conclude that the two main drivers of growth in the last decade have exhausted most of their power.

Our view is that investors should continue to expect positive returns over time while understanding that what worked in the last ten years may be different than what works in the next ten. The path for the coming decade will likely be bumpier and the rewards more moderate.

History teaches many valuable lessons, but one must look beyond the last decade to learn them. We fear many who are heavily concentrated in one asset class, one sector, or a few stocks, do not properly understand the risk they are taking. Those who remain invested and properly diversified, including reasonable inflation hedges, should take comfort in what they have gained and feel well positioned for what may come.