Reading through most of the 'X Things That Will Happen in 2010' posts, it is clear that a lot of commentary is cautious going into the New Year. No question that the world still faces massive financial imbalances that could provide significant headwinds for growth over the next decade. Additionally, a blow up in an emerging market such as China could make this decade worse than the one we just exited.
But if one can see through the fog of war that has permeated our collective consciousness over the previous three years, it's possible to envision the next decade being one of immense economic, social, and technological progress. If you have any faith in mean reversion, you might be interested to know that the S&P has returned an average of -0.9% a year since 1999, including dividends (Bloomberg). Does anyone actually believe the commentators who suggest this disproves the long-run returns available in stocks?
The more probable scenario is that we have seen an abnormally poor period for equities that will revert towards a more historically normal performance record over the next decade. Here are some possible reasons for an historic bull market in the 2010's:
1. A reflection on the differences between our world on Jan 1, 2010 and the world as it was on Jan 1, 1990, or even Jan 1, 2000, should remind you of the enormous progress we have made over the previous decades. Nevertheless, the Dow stands close to where it was nearly 10 years ago. In 1999, when the Dow first hit 10500, the United States had a GDP of $9.22 trillion. Presently, with equity values at a similar level our national GDP is about $12.93 trillion, adjusted for inflation (an increase of about 40%).
2. World GDP growth over this period has been far more impressive. In 1999, global GDP was about $30 trillion, while in 2008 it was about $60.6 trillion. This means that U.S. stocks have stagnated while the total economic 'pie' has increased over 100%.
3. Technological progress has essentially put us in a different eon than we were in 1999, and certainly in 1990. The 'new bull market' theology that was dominant in the late '90s wasn't completely irrational. The market subsequently crashed but the building blocks for a different pace of growth remain in place. Moore's Law, the idea that computing power expands exponentially, is an example of the kind of power technology can provide. Tech stocks will almost certainly be leaders in the next bull market. The significant growth in wireless technology is a keystone development. Additionally, biotechnology has been overlooked in terms of its revolutionary capabilities. Though the Obama Administration has many faults, by liberalizing stem cell regulations it may be unleashing a new economic phenomenon. Many people in the field believe stem cell technology could be the most important development of the 21st century. Another possibility is that progress in alternative energy provides a catalyst.
4. Thomas Friedman's book The World is Flat and Goldman Sachs' BRIC call in the first part of this decade will forever be remembered for their timeliness and prescience. While we have seen enormous growth in a number of emerging markets this decade, the U.S. stock market has only begun to discount the enormous possibilities that EM's may provide. The collapse of the tech and housing bubbles has largely distorted the impact of international growth for U.S. equities this decade. If these markets can avoid major hiccups, it's possible that countries such as China, India, Brazil, Mexico, Indonesia, and Eastern Europe could multiply their GDP and wealth by several orders by 2020. These countries still have a ways to go before they approach the level of development that will certainly be their final destination. Finally, one of the surprises might be the emergence of Africa on the international financial stage around 2015, providing an entirely new arena for growth and investment.
5. The double bubble we have lived through has provided economic policymakers an entirely new perspective on how to regulate and manage market economies. As the 1930s saw the birth of an entirely new form of economic thought in the form of Keynesian economics, so the legacy of this decade may actually be an enhanced understanding of how financial bubbles work. Similar to the way in which Keynesian thinking helped drive the previous 70 years of economic expansion in developed countries, the knowledge gained in the '00s could prove especially beneficial over the next decades. This may surprise many commentators who believe our system is still unable to cope with the massive imbalances that exist. Nevertheless, I have no doubt that academics will be studying this period for years to come. What if Bernanke successfully navigated the exit of the crisis?
Knowing there may be few believers in the above logic, this shouldn't be understood as a prediction but rather as a possibility. Clearly, the looming demographic shifts in the developed world as well as a potentially serious contraction in world oil supply could provide massive headwinds. Nevertheless, I'd be willing to bet the S&P will avoid a second decade of negative returns.
Disclosure: Author holds no positions.