Every January, I send my clients a letter titled The Year in Review, where together we look back at the year that was. What were the highlights? What were the “lowlights”? What did we learn?
But this January doesn’t just mark a new year. It marks the beginning of a new decade. (Unless you are a strict observer of the Gregorian calendar system, in which case the next decade begins in 2021. But I digress.) So, for this letter, we’re going to look back at what shaped the markets in the 2010s – and what lessons we should take with us into the ‘20s.
2010-12: Aftershocks of the Great Recession
The best way to see how much can change in a decade is to remember how things were at the end of the last one. In 2010, we were coming off a major global recession which had devastated the retirement savings of millions of people. Many of the world’s most famous financial institutions had collapsed. And Canada’s unemployment rate was 8.1%.1
It was a scary, uncertain time. While 2009 was a strong year for the TSX, it wasn’t enough to mitigate the losses of the previous year. By 2010, many spooked investors had left the markets altogether.
In hindsight, it might seem obvious that there was nowhere to go but up. But just as the start of a recession is very hard to see coming, the ending can be equally hard to wait for. People can be forgiven for thinking the worst was still to come, because in 2010 and 2011, there were still a lot of ominous headlines to deal with. Remember any of these terms?
Sequestration ● U.S. Debt Ceiling ● European Debt Crisis ● Bailouts ● Austerity ● The Fiscal Cliff
For the first few years, fear abounded as to whether the global economy would be able to recover at all. Nation after nation dealt with spiraling debt that couldn’t be paid off. Remember how often Greece used to be in the news? Some analysts speculated about the possibility of a second recession. 2011 was an especially tenuous year for the stock market, with the TSX falling 11.1% for the year.2 This was largely due to fears over Europe’s debt crisis spreading, as well as the United States’ credit rating being downgraded for the first time in history. And while the TSX recovered somewhat in 2012, it still was one of the worst-performing stock markets among developed nations.
2013-14: A Gradual Recovery
Over the next few years, however, the global economy slowly began to recover. Here in Canada, the unemployment rate began normalizing, while the TSX enjoyed a gradual rise. During this time, the world’s largest central banks were working behind the scenes to keep the recovery going. In the United States, for example, the Federal Reserve embarked upon a massive bond-buying program, to the tune of $85 billion per month.3 This accomplished two things. First, it flooded the money supply and kept interest rates historically low. Lower interest rates made borrowing less costly, which meant businesses and individuals could borrow and spend more, thereby pumping more money into the economy as a whole. This, of course, equaled growth. Slow growth, but growth nonetheless.
The second thing the Fed’s bond-buying did was drive more investors into stocks. Low interest rates often lead to lower returns for fixed income investments, so it was into the higher risk, higher reward stock market that investors went. All this had been going on for years, but the results were only then becoming apparent. So, it came almost as a surprise when the markets reached new highs, even though the economy still seemed to be licking its wounds. It was in mid-2013 that the Dow, an average of thirty of the United States’ largest companies, hit 15,000 for the first time, rising to 16,000 by the end of the year, and then 17,000 the year after.
2015-16: Waiting for the Other Shoe to Fall
But that didn’t mean the markets were immune to volatility. Despite the economic recovery, many experts spent the decade in near-constant fear of another recession. Every wobble, every market correction, was watched with fearful anticipation. Some of this was probably a form of post-traumatic stress caused by the Great Recession. The rest came from the spasms of an ever-changing world.
Oil prices plunged dramatically around this time. In Canada, few things affect our economy as much as oil. Obeying the law of supply and demand, a glut in the world’s oil supply led to a corresponding drop in demand, and prices followed. Meanwhile, on the other side of the planet, China’s stock market crashed. The Greek debt crisis reared its ugly head again, prompting fears that “financial contagion” would spread and create another global recession. Then came Brexit. The news that the United Kingdom would leave the European Union sent shockwaves around the world. And in the United States, one of the most bitterly contested presidential elections in history had both sides of the political aisle forecasting economic ruin if the other side won.
But these grim headlines only slowed the recovery’s march rather than derailing it completely. The TSX fell 11.1% in 2015 but rose 17.5% in 2016.2
2017-19: Housing, Debt, and Oil
One of the major stories of the last few years has been Canada’s housing market. House prices rose for eight straight years, dramatically so in 2017, thanks in part to both globalization and speculation. Many experts feared a bubble had formed, with dire consequences for the economy if it popped. But instead of popping, the market cooled, especially in Toronto and Vancouver. (Recent signs suggest that prices are once again making a comeback.)
At the same time, household debt became a problem for many people. In fact, the average Canadian owes $1.77 in debt – for things like credit cards, mortgages, and other loans – for every dollar of disposable income they earned. That’s a debt-to-income ratio of over 175%!4 Given how much of our economy is fueled by consumer spending, that’s not exactly a good thing. After all, the more people are in debt, the less they can spend. The less they spend, the less our economy can grow.
A third major storyline continues to be oil, especially in Alberta. Excess supply is still a problem. Another problem is the challenge of getting oil out of the country. Oil is largely shipped via pipelines, but most existing pipelines are near capacity, and new pipeline projects have largely stalled in recent years. As everyone knows, it’s hard to sell what you can’t ship, which drives prices even lower.
As you can imagine, each of these developments prompted many pundits to predict disaster. But while the economy certainly slowed in 2019, disaster never quite struck. And indeed, the TSX enjoyed a wonderful end to the decade, having risen 19% in 2019 – the largest percentage increase since 2009.5
What have we learned?
When I looked back at the last ten years, one thing that struck me was how interconnected the world has become. So many of the storylines that drove the markets originated far beyond our shores. We truly live in a global economy. While we might be separated by the world’s biggest ponds, but the ripples near one shore are always felt near the other.
For an advisor like me, it means there’s more than ever to keep track of. But it also shows why we shouldn’t overreact to headlines – or to each individual ripple. A butterfly might flap its wings in Beijing and cause a hurricane in Nova Scotia, as the saying goes, but there are butterflies flapping their wings everywhere. That’s one reason why we saw many storms but fewer economic hurricanes in the 2010s.
Another lesson we learned? Sometimes, slow and steady really does win the race. We were all taught the truth of this as children when we learned the story of the tortoise and the hare. Everyone loves growth that comes fast and hot. But when something burns fast and hot, it tends to burn out faster, too. One reason we never saw the global recession so many people feared is because the global economy recovered as slowly as it did. It’s a lesson we can apply to our own financial decisions. While it’s always tempting to chase after windfalls and jackpots, it’s so much smarter to prioritize steady progress over short-term whims. The race to your goals is a marathon, not a sprint.
A third thing we learned is how often things don’t go as predicted. Despite all the gloomy prognostications over the decade, both the markets and the economy have remained largely resilient. This is why we never base our investment decisions on anyone’s predictions!
2020 and Beyond
With that in mind, I won’t make any predictions for the coming decade. If history is correct – and it always is – another market correction, another bear market, another recession will come eventually. Whether it’s this year, or next, or the one after that, I can’t say. What’s more important is that we remember this: It’s when we fly that we should have the healthiest respect for gravity. But it’s when we’re on the ground that we should raise our eyes to the skies.
Investing is like trying to find our way in the dark – and our strategy is our North Star. It’s more valuable than any prediction! We may bump into the occasional obstacle. But if we hold to that star, we will keep moving forward in the direction we want to go. We’ll make this decade whatever we want it to be.
Happy New Year – My team and I can’t wait to spend the next decade with you!
1 “Rate of unemployment in Canada from 2000 to 2018,” https://www.statista.com/statistics/578362/unemployment-rate-canada/
2 “TSX Composite Stock Market Index Historical Graph,” https://www.forecast-chart.com/historical-tsx-composite.html
3 “Fed Maintains $85 Billion Pace of Purchases as Growth Pauses,” http://www.bloomberg.com/news/2013-01-30/fed-maintains85-billion-pace-of-purchases-as-growth-pauses.html
4 “Canada’s household-debt-to-income ratio down slightly,” https://globalnews.ca/news/5898193/canada-household-debtincome-ratio-q2-2019/
5 “The close: TSX slips on final day of 2019,” https://www.theglobeandmail.com/investing/markets/inside-the-market/marketnews/article-premarket-global-stocks-end-2019-near-record-highs/
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