It is impossible to understate how gloomily this decade began and how no one could have predicted the strength of the economy ten years later. At the start of the decade, the global economy was reeling from the Great Recession and was only beginning to put itself back together. The 2010 U.S. jobless rate averaged 9.6%, with 15 states posting rates in the double digits. Foreclosure rates peaked in 2010 with 2.9 million, or 2.2%, of households, walking away from their mortgage obligations, compared with a typical year where the rate is less than 0.5%. The American Recovery and Reinvestment Act, which passed the year before, was the economy’s life support and started pumping over $830 billion into the system to save jobs and create new ones.
Today, the U.S. is operating at full speed with most economic indicators above long-term averages. The national unemployment rate is 3.6%, and all but two states have rates below 5%. Wages are growing nicely around 3%, and inflation is a modest 2.1%. Americans keep spending—for example, holiday sales rose a hearty 3.4% over 2018—and personal debt is in check with very low delinquency rates. In 2019, only 6% of consumers made a credit card payment late, compared with 15% in 2009. New home sales are about 10% higher than last year, and builder confidence in the newly built, single-family home market reported the highest reading since June 1999. Gross domestic product is growing around 2%. While this is a deceleration from 2018 levels, it still reflects a favorable economic environment.
The current economic expansion, the longest in U.S. history, pushed the stock market to new highs and highlights the resiliency of investment markets. U.S. market indices rose roughly 25–35% in 2019, capping a decade of exceptional returns. Since 2010, the S&P 500 index has more than doubled, and all major indices hit multiple record highs. On several occasions, the market pulled back more than 10%, known as a “correction,” but recovered within months. In August 2019, the current bull market surpassed the one in the 1990s that lasted 113 months. Because of these gains, many investors have added to their wealth this decade.
Monetary and fiscal policy were factors in driving returns, but innovation played a significant role as well. The Federal Reserve gave businesses and consumers greater access to credit and encouraged borrowing by lowering interest rates and engaging in quantitative easing. The amount of credit the Fed extended was unprecedented, with a zero-interest-rate policy in effect until December 2015. On the fiscal policy front, the aforementioned American Recovery and Reinvestment Act cut taxes for individuals and families, reduced sales tax on cars, provided credits for education and children, and extended unemployment. The stimulus created by the Tax Cut and Jobs Act of 2017 is still being counted, but early estimates suggest that it will add well over $1 trillion to the U.S. financial system. Critics often say that these measures are propping up the system and overall debt levels have ballooned, which is concerning. While some of these issues need to be monitored, it is hard to argue with the positive effects they have had on the U.S economy.
On the innovation front, it is worth highlighting a few incredible companies that opened new markets and changed the American experience, furthering economic growth. Do you remember when you received your first smartphone? Early adopters usually place it around the start of the decade. Today, most Americans could not imagine their lives without instant access to the internet, navigation on their phones, and text messaging. The rise of the sharing economy is another excellent example of American innovation. Transportation and hospitality industries have changed forever because of companies like Uber, Lyft, and Airbnb. Finally, the rise of ecommerce makes it possible for consumers to quickly and reliably receive goods and services they want delivered to straight to their door, with companies like Amazon leading the way in distribution. The long-term effects on the U.S. economy are impressive; according to GMSA Intelligence, “mobile technologies and services…will reach $4.8 trillion (4.8% of [global] GDP) by 2023 as countries increasingly benefit from the improvements in productivity and efficiency brought about by increased take-up of mobile services.” While innovation has its downside, and there are causalities, such as the bankruptcies of American icons Toys ‘R Us and Sears, most Americans would rather have these products and services. Overall, the impact on the economy is resoundingly positive.
As we look ahead to the next decade, several themes are emerging. Nationalism may continue to drive restrictive trade policies and tariffs on goods. The distribution of wealth across the globe could widen and potentially destabilize long-standing regimes. Major technology breakthroughs, like 5G, computer learning, and immunotherapy, will likely shift how Americans communicate with each other and experience healthcare. Moral capitalism, impact investing, and other social, environmental, and ethical approaches to leveraging existing wealth will become higher priorities for many investors. The sustainability of government programs, like Social Security and Medicare, will come into sharper focus, and Americans will spend more of their adult lives working given extended life expectancies and less reliance on the government.
For the majority of Americans, and citizens across the globe, the next decade is likely to bring positive change. For many, it will also be another opportunity to build wealth through long-term investing. Identifying growth drivers and potential risks are the tools needed to position client portfolios and capitalize on these themes. The 2010s offer a key learning that even when the economy is struggling, and headlines are daunting, as they were at the start of the decade, there are sound reasons for staying invested, and the resiliency of the U.S. economy should not be underestimated. As Warren Buffett pontificated, “Who has ever benefited during the past 238 years by betting against America?” We are excited for what the next ten years will bring.