I want to thank Jim and leadership at Tower Bridge for the honor of writing these comments on Fridays. As you are well aware, he has a unique writing style that gets difficult information across to the reader in an easy, understandable and enjoyable format. If I can accomplish a fraction of his success, I’ll be happy. That being said, my use of charts, graphs and relevant data points will bring a different look to some of these letters.
Feel free to send feedback and expand the conversation, good or bad! My direct email is email@example.com. Rest easy though, the birthday information in each letter will be provided.
I would also like to note that I am just one member of an exceptional team here at Tower Bridge. We have expanded the research and portfolio management staff with a lot of experienced individuals over the past few years. Anything we produce is a result of hard work from a very talented group that I’m proud to be involved with.
That being said, let’s get started.
With the end of another decade, a quick review seems in order as we’ve had two polar opposite periods to start this century. The first half saw a couple recessions including the worst economic crisis in most of our lifetimes. These brought about two corrections of nearly 50% leading to the 2000 – 2009 period being referred to as “The Lost Decade.” The buy and hold return for the S&P was 10%, in total.
Naturally, the next decade saw the exact opposite as equities returned about 250%. This was also the first decade since 1850 to not see a single recession or bear market, although the end of 2018 saw a 19.8% decline so we’re splitting hairs with that distinction. Every year but 2018 showed positive total returns. Seven of those years brought double-digit gains and three were above 20%. 200 stocks in the S&P made new all-time highs during this period, or 40% of the constituents. In hindsight, buying stocks with every drop in the market proved to be a fruitful exercise.
Even though most of the heavy lifting was done by FANG stocks and technology companies as the NASDAQ gained nearly 400%, there were opportunities in many places to grow one’s portfolio. In total, REITs returned ~210%, Small Caps almost 200% while Foreign Markets lagged big-time but still gained about 75%. Emerging markets were the biggest equity laggard with a 40% advance. Commodities as a whole dropped 45% as excessive investments in the prior decade led to a supply imbalance that has yet to be worked off. The price of crude dropped nearly 30%.
In the fixed income world, returns were also solid as the 10-Year Treasury rate declined from almost 4% to end below 2%. Recall, as rates drop, prices rise and investors still received their coupon. Rates have basically been declining since the early 1980s. Unless we get to a negative rate environment like Europe, there isn’t much room left on the downside. In total, diversified US Bonds returned about 45% during the decade.
Employment was also a major bright spot as the unemployment rate declined from 10% to 3.5% today. This is the largest drop since World War II. The European Union almost unraveled as Greece was nearing bankruptcy. The UK voted to leave the EU. Tariff wars came to the forefront. Numerous malicious software hacks were uncovered. Oil went from $110 to below $30. Famous retailers went bankrupt. GDP only averaged 2.2%. Taking it all in, the 12.8% annual S&P return was quite exceptional.
What does this mean for the next decade? Typically, leaders and laggards change. However, the massive switch from a commodity bull market to an equity bull market that we just saw is more of an extreme. Leadership from here continues to be from Technology and disruptors, at least in the next several years but valuation metrics need to improve. With 5G just now starting to get introduced, the innovations we will see aren’t even on most radars. Artificial intelligence is a long-term theme and will change life as we know it. Virtual reality, autonomous driving, cloud expansion and medical advancements are going to be instrumental in changing the way many industries operate. History shows the five biggest stocks today will not be the same when we hit 2030. That means Apple#, Microsoft#, Amazon#, Facebook# or Google# will have to continue to invest in order to stay on top.
Many more retailers will become omni-channel or go by the way of Sears. The traditional mall experience ends but prime locations offer enough new services to keep traffic afoot. We realize personal interaction is necessary. Biotech and drug discoveries, will ramp up and be driven by AI. Last year saw the biggest decline in cancer deaths led by lung cancer treatments. These prolong lives, but are not cures. This decade will change that as they are already in the pipelines of biotech companies many of us have never heard of.
Healthy eating, active lifestyles and new enhancements will continue to extend human lives even more while wreaking havoc on pension plans and long-term care insurance companies. A major default will occur, requiring Government intervention. Traditional oil use will decline as green energy investments help lower the cost curve as solar, wind and even nuclear become the way of the future.
Most major economists have been calling for higher interest rates since the turn of the century. I would not be surprised if they are finally correct, but 10-year Treasury yields at 6% that we saw in 2000 are not happening. A slow, gradual rise would be welcomed news to the equity markets and retirees. We don’t know the long-term effects of the excessive money printing and nearly $12 trillion in negative yielding debt, but inflation is probable to be an issue at some point. Gold is saying as much today with the recent breakout.
There will be at least one recession and a bear market. Many would be shocked if the European Union survived. China will continue to steal IP. India finally becomes a leader in the global markets as infrastructure is built out. I’m certain Jim has some ideas here as well!
Today, the markets continue to show resilience. Even in the face of a potential escalation in the Middle East, equities are running higher. Oil is below where it was before the fracas. However, leadership is getting smaller as the FANG cohort and go-go growth stocks are leading, while the rest of the market is consolidating.
The 5-day rule where Wall Street will tell you that if the first 5 days are green, then the market will be up for the year has proved to be correct 82% of the time going back to 1950. This first week has generated a 0.7% gain but is being overly bullied by a few mega cap leaders, namely Facebook and Google. The equal-weight S&P was flat, while the Russell 2000 is down 0.3%. The jobs report today came in-line with estimates and points to a healthy market. This is the key for 2020. If jobs remain plentiful, one should expect decent returns. The market is fractionally higher before the open.
Today’s birthdays: Rod Stewart is 75 and George Foreman is 71.
James Vogt, 610-260-2214