By Nick Colas of Convergex
10 Stats About The Last 10 Years
The headline this week that Goldman Sachs’ stock has gone nowhere for a decade got us thinking about general market performance over the last 10 years. The key contours are straightforward: subpar price returns (a 4.9% compounded annual growth rate for the S&P 500) with increased volatility (a VIX that is 25% more volatile than average). From there, things get funky. Consumer Discretionary – not Tech or Health Care – is the top performing sector, up 137% over the decade, in no small part due to Amazon (up 1,600% over the period and in the S&P 500 since 2005). Only one sector is down over this timeframe: Financials, 28% lower (making Goldman an outperformer in its sector, funny enough). And gold (up 87%) has trounced stocks (S&P 500 up 62%). There’s more, and in this note we also look for where some of these anomalies may revert to a longer run mean.
Think back over the last 10 years - how different was your life in April 2006? While you may think your daily existence is largely the same (maybe the kids are older or you’re married now, but that about it…), consider what was actually different about your life in the spring of 2006:
- No iPhone. Steve Jobs unveiled the first iPhone in January 2007, and it didn’t ship until June of that year.
- No Facebook (unless you were in college at the time). Facebook only opened to the general population in September 2006.
- No Twitter. The full version of the product launched in July 2006.
- No Instagram. The picture sharing site only launched in 2010.
- No Kim Kardashian. “Keeping up With The Kardashians” debuted in October 2007.
- No Uber. The company received its seed funding in 2009.
- No iPad. Apple started taking pre-orders on the first-gen product in March 2010.
It feels like April 2006 demarcates the last days of some Dark Age, or at least a simpler time without the manifold distractions of today. And while you might opt for a world without the Kardashians, imagine it without your smartphone, Facebook/social media, and an iPad to entertain the kids (or yourself). It’s ok – don’t panic. You have them now.
The journey from April 2006 to April 2016 in financial markets has, of course, been a wild ride. But just as it is hard to remember what daily life was like a decade ago, it is also easy to forget some of the important waypoints that capital markets took from there to here. And sometimes looking in the rear view mirror is helpful to considering the road ahead.
Investing has a name for that exercise: “Reversion to the mean”. Anomalies can exist for long periods of time, but eventually asset classes revert to some natural risk adjusted rate of return. In economics, policymakers look at long-cycle data to grade their efforts at managing the macro economy. The bottom line: an occasional glance backwards at the data is a useful exercise even if all you really care about is predicting tomorrow.
Here are 10 data points about the last 10 years we hope you will find useful:
#1 – U.S. Consumer inflation (as measured by the CPI) over the last 10 years: 18%. That translates into a compounded annual growth rate of 1.67%, well below the Federal Reserve’s goal of 2%. The most recent core inflation data from the CPI shows a little higher (2.2%), but the core PCE data is more in line with the long run headline average (1.7%).
Key takeaway: a decade – even one with a financial crisis in the middle of it – is a long enough period to assess structural inflation. A 1.7% average rate may just be a new normal, at least until the next recession when it will presumably decline.
#2 – Price appreciation for the S&P 500 over the last decade: 62%. The compounded growth rate here is 4.9%. The best performing major average over the last 10 years is the NASDAQ Composite, up 110% or a 7.7% compounded annual growth rate.
Key takeaway: no matter how you slice it, equity market returns are not double digits anymore even when you add 2% or so for dividend payments. Now, pick the right entry point (mid crisis should do it) and they are obviously much higher. But over a decade, 5-8% seems to be the market’s speed limit. Not bad, but not the +10% numbers of the 1980s and 1990s.
#3 – S&P operating earnings 10 years ago: $73/share on its way to $82 in 2006. Inflation adjusted, those 2006 normalized earnings of $77.50 would be $91.45 today. Actual trailing four quarter earnings for the S&P 500 right now are $100, or 29% higher than the operating earnings back in 2006/7.
Key takeaway: earnings are 29% higher than 2006, but the S&P 500 is 62% above the levels of a decade ago. Earnings multiples have expanded because interest rates have declined; don’t forget that the U.S. 10 year Treasury had a yield of 5.0% in April 2006. Now, it is 1.7%.
#4 – The best performing sector over the last 10 years: Consumer Discretionary, up 136%. In December of 2005, the S&P Committee in charge of choosing companies to add to the large cap 500 index decided to include Amazon. Good choice, because over the last decade the stock has returned +1,600%. In their eyes, however, it was a Consumer Discretionary company, not a Tech concern. That decision, plus good returns from other large brand-name consumer companies, makes this industry the best performing major sector in the S&P 500.
Key takeaway: this sector seems ripe for some reversion-to-the-mean underperformance, unless the S&P Committee finds some other hyper-growth names to add to the collection. Wonder where they would put Uber?
#5 – The price of a barrel of crude in April 2006: $75. If crude oil prices had just kept up with inflation over the last decade, a barrel would cost $88.59. Instead it is $43/barrel.
Key takeaway: What if I told you oil would trade for $30/barrel in 2026? Or $130/barrel? How would it change your long term outlook, and which do you believe is more likely? My own thought is that oil will be higher in a decade and large cap energy stocks are a good long term hold.
#6 – The best performing market cap range in U.S. equities over the last decade: mid-caps, up 87%. Over a long period, you would expect to see risk and return scale as the textbooks tell us they should: more risk equates to higher return. Yet small caps are only up 52% (Russell 2000) to 78% (S&P Small Caps) and the S&P Mid Cap Index is 87% higher.
Key takeaway: another candidate for reversion to the mean underperformance over the next decade.
#7 – Average daily VIX levels over the last 10 years: 21, barely higher than the long run average of 20, but with much higher volatility. The standard deviation of moves in the CBOE VIX Index since 1990 is 8; over the last decade it has been 10. Simply put, volatility was more volatile in the last 10 years.
Key takeaway: One trend that should last for the next decade. The average for the VIX may not move very much, but periods of market churn will elicit greater investor concern. This should be especially true in the next recession, whenever that comes, if only because markets will worry about what policymakers will do to combat that next economic slowdown.
#8 – Total venture capital raise in the last decade: $426 billion. It has been a golden age for VC investors and the companies they support. Many of the new products we listed at the top of this note would have never come to market without this source of capital.
Key takeaway: VC money flows do seem to be waning. Deal count receded in 2015, from 9,381 in 2014 to 8,097 in 2015. Capital invested, however, was $77 billion – the highest in a decade and almost 3x the $26 billion invested in 2006. See here: https://pitchbook.com/news/reports/2015-annual-us-venture-industry-report
#9 – Total money flows out of U.S. equity mutual funds: $209 billion, according to the Investment Company Institute.
Key Takeaway: We don’t have the 10 year numbers handy, but inflows into U.S. stock ETFs over the last 5 years total $368 billion.
#10 - Gold has outperformed equities by a wide margin, +87% versus +59% for the S&P 500.
Key takeaway: one of the more surprising results from our 10 year lookback. The contrarian in me wants to believe the performance here will converge, and equities will outpace gold for the next decade. But consider this: which sounds more likely – gold at $1,860/oz (pretty much its 2011 highs) or S&P 500 at 3126? They are both 50% higher than today’s close.