We live in a different financial world than we did back in 2006. Here are some statistics included in a research note this morning by Convergex that drives home the point.
Drew Voros
Updated
We live in a different financial world than we did back in 2006. Here are some statistics included in a research note this morning by Convergex that drives home the point.
Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York, wrote, “Think back over the last 10 years; how different was your life in April 2006?” Consider 10 years ago that there was no iPhone (2007 debut) or iPad (first pre-orders taken in 2010), Facebook was only available in college (opened to the general population in September 2006), no Twitter (launched July 2006), no Instagram (started in 2010) and no Uber (its first seed money came in 2009).
In turn, Colas notes that the path from April 2006 to April 2016 in financial markets has been a wild ride. Below are 10 data points about the last 10 years followed by Colas’ key takeaway for each. You can find more Convergex research reports here.
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 (midcrisis 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. (Related ETFs: SPDR S&P 500 (SPY | A-98), PowerShares QQQ (QQQ | A-66))
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 2006/07. 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 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 hypergrowth names to add to the collection. Wonder where they would put Uber? (Related ETF: Consumer Discretionary Select SPDR (XLY | A-91)
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. (Related ETFs: Energy Select SPDR (XLE | A-91), United States Oil (USO | B-100))
6. The best-performing market cap range in U.S. equities over the last decade: midcaps, 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. (Related ETFs: iShares Core S&P Mid-Cap (IJH | A-82), iShares Russell 2000 (IWM | A-91))
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. (Related ETF: iPath S&P 500 VIX Short-Term Futures ETN (VXX | B-47))
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 five years total $368 billion.
10. Gold has outperformed equities by a wide margin, +87% vs. +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. (Related ETFs: SPDR Gold (GLD | A-100), iShares Gold Trust (IAU | B-100))
