I want to wish everyone a happy 2020! The last decade was an amazing one for investors. The decade began with fears mounting about the financial crisis and a deep recession, but ended with the longest economic expansion in U.S. history and some of the best returns ever for stocks and many risk assets. For most of the decade, talk circulated about low asset returns, deflation and concerns over the amount of debt, but central bank policy, the printing of money and low/negative interest rates won out in the end to move prices higher. So where does that leave us as we start a new decade?
I expect this new decade to begin as the last one ended, with asset valuations moving higher and interest rates remaining relatively stable domestically and globally. Market rallies and economic expansions don’t just end because of predetermined timing or specific valuation levels. Predicting market tops and bottoms is a difficult exercise because valuations can remain stretched far longer than anyone expects. Cycles end because of either a policy mistake, a quick sentiment change or an extreme overvaluation of an asset class.
Over the course of the next decade, however, I expect the paradigm will change and financial asset returns will be more muted, with most asset classes returning less than 5%. The impact of the unwinding of negative interest rate monetary policy, shifting demographics and the level of debt will ultimately keep a ceiling on asset returns. Just as last decade had many unexpected twists and turns, the new decade will bring many surprises. Stay focused on long-term relative value and sector rotation to generate excess returns.
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