by Jason Norris, CFA
Executive Vice President of Research
As investors turn their calendars to 2020, we reflect on the previous decade in this holiday-shortened trading week. Ten years ago, the global economy was in the depths of the financial crisis and investors just finished posting negative returns for the decade (the S&P 500 fell 9 percent from 2000 to 2009). While this experience scarred a lot of investors, equities bounced back and, if you stayed in the market, your return was over 250 percent, or 13.5 percent per year since then.
The bulk of returns was focused on Large-Cap Growth companies, specifically Technology stocks. Taking a step back, investment returns are dependent on earnings growth and the price you pay for that growth. Growth stocks are companies with above average earnings growth. However, investors typically pay a higher price as a result. In comparison, value stocks are companies that have below average earnings growth and are relatively cheap. The chart below highlights the last twenty years and compares value stocks to growth stocks using the Russell 1000 Value and Growth indices. When the chart is increasing, value stocks are outperforming growth stocks, and vice versa. From 2000 to 2007, value stocks did meaningfully better than growth. Since the financial crisis, growth did meaningfully better.
Source: FactSet
Investors were willing to pay a premium to buy growth stocks since global economic growth was fairly anemic, thus valuing those companies more, specifically Technology stocks. Owning those stocks was a must for the last ten years since 50 percent of the S&P 500’s 250 percent return can be attributed to the Technology sector. The table below highlights the largest companies in the world by decade. Notably, eight of the top ten are Technology stocks, which are typically classified as growth. The table also highlights the changes in the global economy based on what companies and industries shift in and out of favor. When 2029 arrives, will the top ten global companies be similar, or totally different as we saw in previous decades? Will the next decade continue to be dominated by technology or will we experience another shift, either regionally or economically? We expect change as there has been in the past.
Source: Strategas
Week in Review and Our Takeaways:
Stocks finished the week flat after the killing of Iranian General Qasem Soleimani led to selling on Friday. While flare ups in the Middle East are a regular occurrence, this event is a bit more meaningful and may lead to further escalation. We are watching the situation to gauge if we need to change our economic outlook for 2020. As of now, it is too early to do so.