Since 2008: US Markets (Part 1 of 3)Submitted by Headwater Investment Consulting on October 1st, 2018
By Kevin Chambers
Ten years ago this month, we saw the largest bankruptcy in American history, Lehman Brothers. It was an event that pushed our economy and financial markets into a tailspin. This series of blog posts look back at the last 10 years for some perspective. In Part One, we are diving into the financial markets. What has happened since that terrible month in September 2008 for stock markets and bond markets?
US Stock Market
From March 2009 to August 2018 the S&P 500, a measure of large companies in the US, is up 382%. Small companies in the US, measured by the Russell 2000, is up 410%. To put this into perspective, if you invested $10,000 in the S&P 500 over the same period, it would be worth $48,205 today, and $50,954 if you invested in the Russell 2000.
Since the turmoil in 2008, there has been no year where, over the course of an entire year, the S&P 500 has been down. The two worst years were 2011 and 2015. Returns in 2011 were muted due to the European credit meltdown spurred by troubles in Greece, Portugal, and Ireland. Likewise, 2015 returns were also affected due to Greek instability as they missed their IMF payment and the European economy was once again threatened. Otherwise, the last decade has been marked with big equity gains. On average, the S&P 500 has returned 11% every year since 2008.
Even though the US stock market was generally on an upward trajectory, there were some big drops in the market. About 30% of the months since 2008 had down stock market returns, with 15 months experiencing drops of over 2% and 4 months dropped over 6%.
International Stock Markets
Since March 2009, International stock markets have also been on a tear, although with a few hiccups. Developed markets increased 178% with Emerging Markets increasing 211%. Even though the US was the focal point of the 2008 crisis, the aftermath hit international markets, especially Europe, harder than US markets. The aftershock of the crisis hit Europe in 2011 with defaults of Greece, Portugal, and Ireland. It threatened to unravel the EU as it stood. In 2011, developed markets lost 12% with emerging markets losing 18%. Developed markets also lost in 2014 and 2015 as the Greece pandemic spread. Overall, 2018 has also been tough on the international markets, with the Turkey crisis showing that Europe’s problems are far from over.
Even with more volatility, international markets still made money over the last decade. Investing $10,000 in developed markets would have more than double your money to $25,840. Emerging market investments also would have increased you to $26,625. That is a 3.7% and 3.4% annual return over the last decade.
Bond returns have been much more muted, but also a lot less volatile. After the 2008 crisis, central banks around the world lowered interest rates to the lowest levels in decades. In the US, rates stayed low for many years, but have recently started to inch back up. In Europe and Japan, interest rates have just continued to fall. At one point, the interest rate on the 10-year note in Germany actually went negative.
2013 marked the worst year in the US bond market that we have seen in 25 years. Bonds were down 2% for the year. Otherwise, US Bonds have made money every year since 2008. In fact, US Bonds have returned 3.7% annually over the last 10 years. International bonds have had more fluctuation. As yields fell from 2013-2015 and investors lost faith in the European and Japanese central banks, international bonds lost money. They have only averaged 2.2% annually over the last 10 years, after being down over 3.5% in both 2015 and 2013.
This is one of my favorite charts. We call it the periodic table of market returns. It is a good visual reminder that given different periods of time, no single asset class is always the best place to have your money. The last 10 years have been especially good in the equity market. It’s actually the longest bull market in history.
And before you get too excited about the big returns in the equity markets it is helpful to remember the reason bonds are in our portfolios. In the periodic table, you can see in the time periods when the stock market is down, bonds tend to be closer to the top.
Here are two other charts for good measure.
It is impossible to predict what is going to happen in the future. Many people are concerned that the recent increase in equity markets is leading to the eventual bubble. The question is when this bull market ends, not if. Even with the current political turmoil in the United States, the “when” can be a pretty big window. It could be tomorrow or in 10 more years. After huge returns in 2013 and 2014, people were calling for a bursting bubble. And if you sold all of your equity at the end of 2014, you would have left over 50% return and $5,000 on the table. This is why we advocate building diversified portfolios that have broad exposure to many asset classes, not only between stocks and bonds, but also around the world. All in all, the last 10 years have been great for financial markets, even though most people don’t think so. In the next blog post, we will look at the US economy and see how it has fared over the last 10 years.