This decade that is coming to a close has been rewarding for investors. The 2010s were marked by a slow but prolonged economic recovery following the Great Financial Crisis of 2008 and 2009. The U.S. began the decade with an unemployment rate of 10%. Now it is 3.5%. The current U.S. economic expansion is the longest in U.S. history.
Stock and Bond Return Expectations
Against that backdrop, global stock markets as measured by the MSCI All Country World Index in U.S. dollar terms returned 8.9% annualized over the past 10 years. In local currency terms, the 10-year annualized return was 9.9% as a strengthening dollar lowered the dollar-based returns of non-U.S. investments. U.S. stocks did even better, returning 12.9% annualized on a nominal basis as measured by the MSCI U.S. Index.
The U.S. bond market returned 3.6% annualized over the past 10 years as measured by the Bloomberg Barclays Aggregate Bond Index. The math of bond investing is that the best predictor of bond returns over a 7 to 10-year holding period is the starting yield-to-maturity. At the beginning of the decade, U.S. 10-year Treasury bonds were yielding 3.8%. Ten years later, the return of the overall U.S. bond market was very close to that starting to yield.
As we look to the decade ahead, the U.S. bond market has a yield-to-maturity of 2.3%. Based on that, 2.3% annualized on a nominal basis is a reasonable return expectation for U.S. bonds over the ten years.
A reasonable return expectation for global stocks in the next decade is 6.1% annualized on a nominal basis with a range of 0.7% to 9.2%. There is more uncertainty in forecasting returns for stocks than there is for bonds. While bond returns over a decade long holding period are driven primarily by interest income, stock returns are driven by dividends, earnings growth and changes in valuations. More components mean more uncertainty when it comes to predicting stock returns. While dividend yields are generally stable, earnings growth and what investors will pay for those earnings in the future is highly uncertain.
There are four forces that will influence economic growth, stock returns, and interest rates in the decade ahead. These complex forces will interact with each other, leading to feedback loops and uncertain outcomes.
The forces are climate change, money, trust, and technology.
Climate change is upon us and this next decade will see more of the financial impact as households, businesses, and governments adapt.
Money. How much will be created? How much will be borrowed and paid back? How will it be spent? How will it be manipulated by central banks? How unequal will be its distribution? Answers to these money-related questions will shape the decade ahead.
Functioning economies, governments, and financial markets depend on trust. Trust in institutions and interpersonal trust is low and declining. One of the biggest risks in the decade ahead is a lack of trust leads to more tribalism and a breakdown in the institutions on which capitalism and democracy depend.
One of the disappointments in the decade coming to a close is how technological advances did not translate into a higher rate of productivity growth. Productivity measures how efficient an economy is with regards to the resources, including people, required to produce goods and services.
Economists remain perplexed as to why economic productivity is not accelerating. They are unsure if it is a measurement problem or businesses are just not as efficient as they could be because they do not make better use of technology.
Without steady productivity increases in the face of slowing population growth, economic growth in the decade ahead could be lower than in the decade coming to a close. That means lower-income growth for households and businesses and lower stock returns for investors .
There are of course other forces and surprises that will impact economic growth and financial market returns in the decade ahead. As investors, we must be adaptable in our portfolio approach so that we can take advantage of the opportunities that present themselves as well as reduce risk if the global economy and financial markets take a turn for the worse.
Please enjoy episode 281 as we take a closer look at these four forces and reflect on how we will change in the decade ahead.
Range: Why Generalists Triumph in a Specialized World by David Epstein
An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk by Allison Schrager
The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction by Richard Bookstaber
Arctic Report Card: Update for 2019–Arctic Program
Climate Change Is Ravaging the Arctic, Report Finds by Kendra Pierre-Louis—The New York Times
California Bans Insurers From Dropping Homes in Wildfire Areas By Nicole Friedman—The Wall Street Journal
Florida Keys Deliver a Hard Message: As Seas Rise, Some Places Can’t Be Saved By Christopher Flavelle and Patricia Mazzei—The New York Times
Strategies to Address Climate Change Risk in Low- and Moderate-income Communities – Volume 14, Issue 1—Community Development Innovation Review
Hedge fund TCI vows to punish directors over climate change by Leslie Hook and Gillian Tett—The Financial Times
Economists are rethinking the numbers on inequality—The Economist
The World Has Gone Mad and the System Is Broken—Ray Dalio
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140: How Climate Change Could Impact Your Investments and Your Life
256: Will Artificial Intelligence Change Investing?
262: Better Not Bigger, Circular Not Linear – How the Global Economy Is Changing
280: Travel and the Trust Economy
Welcome to Money for the Rest of Us, this is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 281. It’s titled, “Four Forces that Will Shape the Next Decade.”
This is the last episode of the year and the last episode of the decade. A time for reflection. One of the things I’ve been doing is reading a book called Range by David Epstein. I started the book, I put it down, and then I recently picked it up again.
He mentioned how psychologist Dan Gilbert and his colleagues measured the preferences, personalities, the values of more than 19,000 adults. Their ages ranged from 18-68. And they asked some of them to predict how they would change over the next decade. And then he asked others to reflect on how they had actually changed in the previous decade.
What was interesting is the predictors didn’t think they would change very much over the next decade, whereas those that reflected back were astounded by how much they had changed. That their preferences, Gilbert says, for vacations, music, hobbies, and even friends were transfigured. He writes, “the precise person you are now is fleeting, just like all the other people you’ve been. That feels like the most unexpected result, but it’s also the most well-documented.”
We will change in this next decade, just like we’ve changed in the past. I was looking back in my journal for the first post I wrote in the decade. I don’t write in my journal very much, the first post wasn’t until November 7th, 2010. I wrote, “My profession continues to be rewarding. The economic environment is still tenuous, but the Great Recession officially ended over a year ago. But its impact continues to be felt with unemployment over 10%. We’ve navigated our clients through it all and I’ve come through a much wiser investment strategist. I spend more time learning, writing, and speaking at conferences. It has been rewarding.”
10% unemployment rate, December 2009, and then it was just a downward slope. Now the unemployment rate is 3.5%. So the economy has had a decade, at least in the U.S., of expansion. No recession at all, the longest recovery in history. Globally, we’ve not had major recessions. There were some pockets of slowdown. That was at the beginning of the decade.
A year later, I quit my job. It took me a while to figure out what to do next. I launched and shut down 5 different investment-related websites, before launching this podcast in May 2014. I’ve done over 280 episodes this decade. So more than half the decade I’ve been podcasting, commenting on what’s going on with the economy, the world, the financial markets. I ended the decade by releasing a book, Money for the Rest of Us: Ten Questions to Master Successful Investing.
Which reminds me, the audiobook is now available on Audible and you can get that audiobook for free. I narrated it. If you’re not an Audible member you can get a 30-day free trial and you get a free book as part of your 30-day free trial. You can choose my book if you would like. You can get more information about that at moneyfortherestofusbook.com.
I undertook a major career transition this past decade. Moving from investment advisor to podcaster, educator, writer. Herminia Ibarra, she’s a professor of organizational behavior at London Business School, she studies career paths and career transitions and has looked at many examples of that.
Epstein mentioned her in his book, Range, and that she criticizes convention wisdom articles about career planning advice, such as this one from the Wall Street Journal that says, “the painless path to a new career is to simply form a clear picture of what you want before acting.” Know what you want, then just go for it. Not that simple.
Recall in episode 268 where I quoted the economist Allison Schrager who said, “knowing what you want might be the hardest part of risk management.” It’s hard to figure out what we want. Ibarra says, “We discover the possibilities by doing, by trying new activities, building new networks, finding new role models.” I did a lot of that this past decade, and I suspect you have too, that you have changed. Podcasting was just an experiment, thought I’d try it out. I liked it. I continued to do it.
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