The 2010s were an odd decade for the global economy. The recovery from the so-called Great Recession has persisted but it has been sluggish. The US is enjoying its longest continuous expansion on record but while it has lasted a long time, it has been relatively shallow. The eurozone, absent a brief upturn in 2016 and 2017, has generally been in either a state of abject crisis or stagnation. Across the advanced economies, productivity growth has slowed and demographic tailwinds have gradually become headwinds. All told, their average annual growth of 3 per cent in the 1980s and 1990s compares to 2 per cent or so in the 2010s.
But despite a decade of slower growth in the core global economies—and a decade of very poor real income growth for most workers—investors have little to complain about. Global stocks, and especially US ones, have boomed and, at the same time, returns from holding bonds have exceeded almost anyone’s expectations. Losing money has been pretty hard.
The factor linking sluggish economic outcomes and a bonanza for global investors has been historically low interest rates. Global central banks rode to the rescue of the economy in 2008 and 2009 by cutting them to previously unimagined levels. Policy then became “unconventional” with the advent of quantitative easing (the electronic creation of new money by central banks to purchase assets), negative interest rates in Japan and much of Europe and all manner of schemes to boost lending and credit growth. Unconventional policy has failed to kickstart a strong recovery but it may have prevented the world experiencing another depression. The impact on asset prices, though, has been extreme.
So, what will the next decade hold for investors? An important part of that answer will be decided by the direction of rates. The US, between late 2016 and 2018, tried to lead the way in slowly “normalising” monetary policy. The Federal Reserve gradually raised rates to 2.5 per cent by early 2019, still half the level that would once have been regarded as normal but well above that seen in Europe, the UK or Japan. Over the past few months, however, it’s been forced…