Note from the CIO: The 2010s

At the start of the 2010s, the Financial Crisis was very much part of our daily psyche and there was a sense that capitalism had failed. Scholars and economists will debate for years over the root causes of the Crisis, but the fact remains that millions suffered during and after. Yet, many developments quietly unfolded over the ensuing decade that would suggest markets are still creating benefits for individuals and the world. 

Recently, my family has taken in a young man who my older son met in college and who was living out of his car and generally down on his luck. I have been mentoring him and helping him make better choices (my wife and I have become so fond of him that we refer to him as “Son 3”). Recently he found an ideal job for his situation. When I see the pride in his eyes and the self-esteem he is starting to develop, I’ve realized – and this is just my humble opinion — that the most “sustainable” thing we can do for the world is to make real jobs for real people. 

One of our objectives at Abacus is to deploy clients’ financial capital to help businesses create jobs like the one this young man got, all while using fewer resources to improve standards of living. As a new decade starts, it seems important to look at where we are, and how things compare to historical norms. 

Some highlights that I believe matter for long-term investing include:

• The 2010s saw extreme poverty drop below 10% of the world population for the first time in human history. When I was born in 1970, there were about 2 billion people living in extreme poverty or 60% of the world population at that time; today, the number of people living in extreme poverty has fallen to 700 million. This is in large part due to the liberalization of economies in much of the developing world, including China and India. Humanity still has a lot of work to do before it reaches its full potential with no one living in extreme poverty, and Abacus aims to help its clients provide capital to this profound effort.
• A key to alleviating poverty is to make it easy for individuals to start businesses. Thankfully, the cost of starting a business has drastically declined, especially in developing economies. In low- and middle-income economies, the average cost of starting a business was 1.4 times annual per-capita income in 2004. By 2019, it had fallen to 0.31, a 78% decrease!
• Child mortality (the global number of annual deaths of children under age five) fell below half of 1990 levels, as more nations gained access to health care markets and affordable, reliable energy markets.
• Global life expectancy increased by more than three years in the past 10. This is mostly thanks to the prevention of childhood deaths (the incidence of malaria in Africa declined almost 60% from 2007 to 2017), while antiretroviral therapy also reduced HIV/AIDS deaths more than half. Identifying the most effective humanitarian interventions and impactful investments of the ‘20s are global challenges to which we are devoting considerable energy. 
• September 2018 was the first time in human history that more than 50% of the global population was considered middle class, approximately 3.8 billion people. One major benefit of this is the demands the middle-class places on the global economy, resulting in more entrepreneurial opportunities and increased commerce. To put this in perspective, only 1.8 billion, or 26% of the global population, were considered middle class in 2009. 
• We have become more sustainable in the way we use the planet. Using empirical evidence, MIT scientist Andrew McAfee argued in his book, More From Less, that some nations, including the US, are transforming themselves in fundamental ways: polluting the air and water less, emitting fewer greenhouse gases, and replenishing endangered animal populations. Furthermore, nations are using less overall: less metal, less water, less land. Not just in proportion to productivity, but less stuff overall. McAfee says this turnabout was made possible through the collaboration between technology and capitalism.
• Efficiencies in agriculture mean the world is now approaching ‘peak farmland’ — despite the growing number of people and their demand for more and better food, the productivity of agriculture is rising so fast that human needs can be supplied by a shrinking amount of land. In 2012, researchers at Rockefeller University argued that, thanks to modern technology, we use 65% less land to produce a given quantity of food compared with 50 years ago.

The media tells us this is the longest economic expansion on record. This simply means there were no two quarters in a row with negative growth (although there were at least three separate quarters with negative growth). Given that levels of economic growth was, at best, average over the decade, this should not give one the impression of an overheated economy. Importantly, there is a common misunderstanding that the 2010s was the longest expansion in the stock market on record. This could not be further from the truth. It is simply an error to conflate the economy and the stock market. Although the stock market performed above average in the 2010s, it was not without its periodic bear markets. Since World War II, these have happened about every 5 years on average, and almost like clockwork, they occurred in 2011 and again at the end of 2018[1]. In fact, in July of last year, we discussed how the stock market “expansion” of the 2010s was not nearly as significant as the other two great stock market expansions since World War II; in October of last year, we also discussed how there was no objective evidence one would be investing at a dangerous market-high at that time (or now).

The S&P 500 stock index of the largest US companies earned an annual average return of 13.4% over the 2010s, including dividends[2]. This is above the long-term average, but the index’s return of 6.2% for the past 20-years (from the start of the century) has been below average. A Global Stock Index consisting of all asset classes Abacus uses returned 10.5% over the 2010s, and 8.8% since the turn of the century[3]. 

Here are the past four decades in one chart:

Over multiple decades, average annual returns have been similar for Global Stocks and the S&P 500. But as the chart shows, large US companies alone can be a much more unpredictable ride, and are therefore not as well-suited for funding a family’s financial plan that seeks as much predictability as possible.

So, what’s in store for the 2020s? Well, for one thing, stock market investors still showed jitters several times throughout 2019 when tensions mounted in politics and foreign affairs. That to me is an important indicator the stock market is not overheated. Also, the past decade has been the worst performing decade on record (since 1926) for lower-priced (‘value’) companies, which are favored in all Abacus portfolios. Yet these value companies have out-performed the S&P 500 in over 80% of all decades on record. While I can’t promise anything, the reasons for these long-term historical relationships between different types of investments have not changed, and so it seems to me a very good time to be allocating capital as Abacus does. May your new year – and decade — be filled with ingenuity, energy, health, and prosperity.

[1] A bear market is commonly considered a 20% drop in the S&P 500 stock index. In 2011 and 2018, the drops were 19.4% and 19.8%, respectively. The 2011 event had the same sense of terror as 2008, and 2018 is just a rounding difference from 20%.

[2] All performance numbers are through 11/30/2019 since not all index data was available through 12/31/19 at the time of writing in early January 2020. Decadal performance numbers for the 2010s, 2000s, 1990s, 1980s, cover a full ten-year period through November 30, one month before the end of the respective decade.

[3] Fees have not been subtracted from the Global Stock Index.

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