January 31, 2020

Can you believe that the first iPad was introduced in April of 2010? Yes, it really was only ten years ago!

Even as we celebrate the new year and new decade and what’s to come, stopping to think for a moment about what has changed over the last decade can be an eye-opening experience. Technology has been at the forefront of much of the change and it now touches our lives more than ever⁠—from the personal devices that have become something many of us can’t imagine living without, to our cars, the way we watch TV, work and shop for everything (even groceries). The list goes on and on. In many ways, technology has been just as transformative over the last ten years as the advent of the internet that drove the previous economic cycle, only this time it seemed to slowly sneak up on us.

This impact has also been similarly reflected in financial markets where U.S. equity markets have outperformed every other asset class collectively over the last decade. In hindsight, this isn’t all that surprising given that many very successful U.S. technology companies have been responsible for the lion’s share of the technological advancements that the world has experienced over the last decade, and they also make up a large, and ever growing, percentage of the investable universe in the U.S. 

When the previous decade began, the combined market cap of Apple, Amazon, Microsoft and Google was about $715 billion; this number currently stands at more than $4 trillion. Facebook did not even go public until 2012 and it now has a market cap of $575 billion, up from its original listing value of $80 billion. These five companies alone now make up more than 17% of the S&P 500 index. Outside of the U.S., equity markets are dominated by financials that make up almost a quarter of the investable universe. Banks have generally struggled in the low-to-negative interest rate environment that exists globally and this has resulted in lackluster stock performance.

And yet, not all of the domestic stock market rise can be attributed to technology. Innovation and adoption at the scale that we have witnessed over the last decade would never have been possible without the Federal Reserve’s aggressive and accommodative quantitative easing measures that initially brought short-term interest rates essentially to zero for more than six years, and have continued to keep them relatively low. Other central banks, such as the European Central Bank, did not act as swiftly after the severe credit crisis and subsequently paid a big price in the form of a second recession followed by relatively stagnant growth and, now, more extreme monetary policy that has brought interest rates into negative territory.

Global economic growth, however, appears to be stabilizing as China has pulled back from the reform measures that slowed its own economic growth, plus the trade war has recently de-escalated. In our view, this could create an environment where international equities begin to outperform those of the U.S. as incremental GDP growth in emerging markets begins to outpace that of developed markets. Furthermore, the traditional U.S. technology companies that have driven such historic gains over the last ten years are now of a size where growing significantly more is becoming harder. For example, Apple’s revenue has grown 250% over the last ten years and is projected to come in at $263 billion for 2019. More than likely, Apple will generate decent low to mid-single digit earnings growth over the next several years, but the odds of this driving a 100%+ gain in the stock are slim.

As we look at what the next decade is likely to bring, there is no doubt that innovation across many industries will continue and the U.S. will likely play a meaningful role in it. However, other growing and maturing economies, such as China, have the potential to drive a significant amount of innovation and change as well. Similar to the U.S., talent from China’s own established technology giants such as Alibaba, Tencent and Baidu have been leaving and forming startups that are being funded by a growing private equity market, and this could end up mimicking the type of evolution of the technology industry typically seen in the U.S.

Healthcare may also move to the forefront as more work in immunological therapies, gene-editing, personalized medicine and artificial intelligence, among many other things, that could significantly change⁠ (and improve⁠) healthcare as we know it today.

While there are many exciting things to look forward to in the decade ahead, we would be remiss not to mention the high likelihood of a recession occurring sometime during this period. The Federal Reserve, along with many other central banks around the world, has been incredibly accommodative, making a recession unlikely in the near term. However, with the information we have today, we can see a few possible paths to a recession. Loose financial conditions could result in financial excesses like the ones we saw during the last two cycles that ultimately caused recessions (one quite severe). Inflation could also finally begin to rise, forcing the Federal Reserve to raise interest rates against a backdrop of mediocre growth. Lastly, an unforeseen event that directly impacts the economy could certainly be possible as well.

Building a portfolio that can perfectly navigate both the next wave of innovation and potential growth as well as an impending recession is a near impossible task. Maintaining a diversified allocation and having the personal fortitude and/or financial advisor’s help to stay invested and rebalance along the way have historically led to the best long-term outcome. After all, missing the ten best days in the stock market over the last two decades would have resulted in an annualized return less than half that of someone who had just stayed invested. That’s meaningful. Indeed, this could be one of the greatest investing lessons of the last decade as there have been plenty of reasons to be concerned along the way and, so often, these moments can prevent us from seeing the positive, transformative nature of other trends happening around us. We know the next decade, like many before it, will be filled with a healthy dose of success, innovation and challenges and we’re looking forward to the journey with you as we navigate financial markets on your behalf.