Market Commentary: Winter 2019 - The Difference in a Decade

Jan 15, 2020 Willow Creek Wealth Management Posted in Market Commentary


At the end of 2019, the S&P 500 Index (which is comprised of a mix of 500 US large company stocks) was ascendant, with an average annualized return of +11.2% over the past ten years, and it finished 2019 with a one-year return of +31.5%. It was the best performing of the major asset classes we follow for both the decade and the past twelve months. It has been an extraordinary run.


But if you go back ten years to the end of 2009, the US market had, at that time, just come off one of its worst decades ever. The period from 2000 to 2009 was marked by two large and painful downturns: the bursting of the tech bubble in 2000-02 and the Great Recession of 2008-09. In the tech bubble, the S&P 500 Index declined by -49% (and the technology-based NASDAQ Index declined by -77%) while in the Great Recession the S&P 500 Index dropped by -55%.  As a result of these bookend declines, the period became known as the “lost decade” where the annualized return for US large stocks from 2000-09 was -1.0%. By way of comparison, emerging markets were up +11.0%, US small stocks +7.9%, US bonds returned +6.3%, and developed international countries +2.6%.  US large value stocks returned +2.5% while US large growth stocks lost -4.0%.


As the 2000-09 decade closed and a new one started, financial commentators were wondering where one could put money and avoid the returns of US large stocks. The consensus view towards the end of 2009 was that the American economy was entering into a period of flat to negative growth and that US stocks were in a for an extended period of low returns; bonds were to be avoided at all costs as rates were low and forecast to rise (which hurts the principal value of bonds). Hot money was instead flowing into the emerging and international markets that were deemed to have better prospects for longer-term growth.  Many investment companies touted expensive hedge funds and so-called alternative investment strategies as a panacea for investment fears. The story was anything but US stocks and bonds. As we now close out this decade, of course, the least expected became the best performing. US Large Cap stocks (particularly those on the growth end of the spectrum) outperformed all other major markets, including small and value stocks; bonds performed surprisingly well, while international and emerging market stocks all came in well below their long-term averages. 


We will continue to do what we always do: invest in a diversified portfolio that is comprised of a combination of these asset classes. Some asset classes will do well and others not as well at any given time. During the ups and downs, we will systematically rebalance your portfolio – selling high and buying low. We will continue to reduce unnecessary fund and trading costs and make sure we are being tax-efficient, to the extent we can, with all trading. Additionally, we will continue to have a tilt towards value stocks and small stocks. Our portfolios will never outperform the highest returning asset class, nor will they be as low as the worst-performing asset class. But, on a long-term basis, they will have a smoother long-term ride and a greater likelihood of reaching their stated investment goals. Evidence, time and time again, shows that over the long-term, a diversified portfolio will return a reasonable rate of return for a given amount of risk. Or to put it another way, while we continue to have great confidence in the US markets, we will also continue to invest in the markets that are currently less popular or might not have done well in the recent past. We will continue to hold bonds and emerging market and international stocks, and we will stick to a value-oriented strategy. At some point, sentiment will switch away from the US, and when it does, it will come with a speed that no one will expect. Until we have that perfect vision of 20/20 hindsight, we feel it is the best approach to get you to where you want to go.