Institutional Perspectives
Investments: Bringing the 2020s into Focus
Lord Abbett experts review the trends that influenced the past decade for economies and markets—and may influence the next.
In Brief
- At the dawn of a new decade, we asked Lord Abbett investment professionals to look back—and forward—at global economies and markets.
- Among the factors that influenced the 2010s were global monetary easing, technology, and the lingering after-effects of the 2008–09 financial crisis.
- One major macro factor that could influence the next 10 years: the continued rise of China as an economic power. Our experts also identified credit and innovation growth equities as investment categories to watch.
The 2010s were a chaotic, tumultuous, and ultimately profitable, time for many investors. How should we think about the next 10 years?
The past decade began with “animal spirits left for dead by the [2008–09] financial crisis” but was poised to finish with “stocks near records, volatility vanquished and the credit supercycle on steroids,” according to a Bloomberg report.1 Along the way, there were many remarkable developments in global economies and markets, geopolitics, and technology.
When asked to sum up some of the key themes of the 2010s, Lord Abbett equity trader Nestor Melendez cited “the rise of passive investing, negative-yielding bonds topping out at over $17 trillion, the growth of ESG (environmental, social, and governance) investing, MiFID II and other securities industry regulatory changes, the rise of ‘robo’ advisors and other manifestations of the growing role of technology in the financial sector, and the increasing influence of private equity in financial markets.” Meanwhile, for investors, the global news cycle seemed to be stuck on hyper-speed (see infographic).
Source: Bloomberg, U.S. News & World Report, and Lord Abbett.
As we noted before, many investors reaped gains from strength in key asset classes during the decade (see Chart 1). U.S. and global equities enjoyed significant returns, while lower-rated securities outperformed in U.S. fixed income. U.S. municipal bonds posted solid returns, with the market strengthening into the close of the decade in response to supply/demand factors and changes to the U.S. tax code.
Chart 1. How Did Major Asset Classes Fare in the 2010s?
Average annual returns for the period January 1, 2010–December 31, 2019
Source: Bloomberg. Data as of 12/31/2019. Municipal bond returns do not reflect effect of their tax-exempt status for investors in the United States.
U.S. Small Caps=Russell 2000® Index. U.S. Growth=Russell 3000® Growth Index. U.S. Value=Russell 3000® Growth Index. Global Equities=MSCI ACWI (All Country World Index). Emerging Market Bonds= J.P. Morgan Emerging Markets Bond Global Diversified Index. U.S. Aggregate=Bloomberg Barclays U.S. Aggregate Bond Index. Global Aggregate=Bloomberg Barclays Global Aggregate Bond Index. U.S. IG (Investment Grade) Corporates=Bloomberg Barclays U.S. Corporate Bond Index. U.S. High Yield=ICE BofAML U.S. High Yield Index. U.S. Treasury Bills=ICE BofAML U.S. Treasury Bill Index. U.S. Municipal Bonds=Bloomberg Barclays Municipal Bond Index. U.S. High Yield Munis=Bloomberg Barclays High Yield Municipal Bond Index.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
For financial markets in general, Lord Abbett investment strategist Tim Paulson characterized the last decade as “one dominated by central bank activity, namely easier monetary policy across the globe, and declining risk premia.” He notes that in fixed income, five-year U.S. Treasury securities were yielding 2.65% to start the decade, and the broad bond-market benchmark Bloomberg Barclays U.S. Aggregate Bond Index (U.S. Aggregate) yielded around 3.60%. “A total return over the following decade of 3.75% might seem a bit disappointing given the strong returns” in other asset classes, and the declining yield environment, Paulson says. But he adds that for investors with longer investment horizons—such as an entire decade—the starting yield of a longer-duration, high grade asset class is likely to be “a very good indicator” of the total return over that time. “Unsurprisingly, indexes with more credit exposure, and thus higher yields, than the U.S. Aggregate—such as U.S. high yield, emerging-market bonds, or U.S. investment-grade corporates—posted higher returns.”
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For the U.S. equity market, “if there has been a persistent theme over this past decade—amid fears of another U.S. recession, multiple quantitative easings by the U.S. Federal Reserve, ultra-low to negative interest rates, seismic political swings, and still-resilient equity markets—it has been a short-term focus among investors,” says Lord Abbett investment strategist Brian Foerster. He points to trends in U.S. mutual fund and pension asset flows which “illustrate the stark difference in preference for low-volatility, low-return investments and avoidance of more volatile, higher-returning assets.” This, he says, is a likely result of “the extreme loss aversion following the lost decade of 2000-2008 that has kept the average investor tethered to the perceived safety of low-volatility and income-generating assets.”
Conversely, notes Foerster, while hedge funds and high-net-worth investors “happily bought innovation-oriented stocks (for example, technology, ecommerce, and biotech),” U.S. mutual fund investors and U.S. pensions shunned them due to their historical volatility. That stance may have cost them the opportunity to participate in the outsized gains in the U.S. growth category during the decade, as shown in Chart 1.
Investment Considerations for the Next Decade
While it’s useful to reflect on the economic and market trends of the past 10 years, investors must also think about what might influence asset performance in the decade ahead. As a follow-up to our 2020 Investment Outlook roundtable, we asked the Lord Abbett investment leaders who participated in that discussion for their thoughts. (We have previously published decade-ahead views on U.S. municipal bonds from Lord Abbett Partner & Director of Municipal Bonds Dan Solender and global currencies from Lord Abbett Partner & Portfolio Manager Leah Traub.)
Global Economy: The last 10 years constitute the longest U.S. economic expansion on record, notes Lord Abbett Partner & Director of Strategic Asset Allocation Giulio Martini, but also “the feeblest” as measured by GDP and productivity growth. Notwithstanding the absence of a U.S. recession, he adds, it was also the decade when China became the largest contributor to global economic growth even as its economy slowed.
“It was also a decade of low and stable global inflation,” he says. But Martini thinks the next decade could witness inflation becoming destabilized by persistently tight resource markets, especially in the United States. While there is no sign of this happening yet, “the consequences of such a development would be so pervasive that it is a risk that needs to be taken into account.”
“There is little doubt that China’s economy will continue contributing more to global economic growth than any other single country,” says Martini, and that its economy will get closer to overtaking the United States as the world’s largest. “How geopolitics is rearranged as the era of U.S. economic hegemony comes to an end will also be a critical influence shaping opportunities for global investors,” he concludes.
Fixed Income: Paulson expanded on his earlier observations on the past decade’s performance of lower-rated U.S. fixed-income securities, noting the potential benefit of these securities’ higher yield for long-term returns, which “should anchor the outlook” for these investments for the next decade. “While asset classes such as high yield certainly had their bouts of volatility, the perspective of a 10-year horizon reminds us why we encourage investors to think of credit as a long-term holding–because historically, it has simply outperformed several other categories of fixed income.”
U.S. Equities: For the coming decade, Lord Abbett Partner & Portfolio Manager Tom O’Halloran believes that for his specialty area, innovation growth equities, the No. 1 theme “will likely be the ongoing advance of the technology revolution.” Why? He says that “the continued exponential gains in processing power… will, in our view, be a key raw material for new business creation on a wider basis (throughout the U.S. economy), and will enable businesses to scale to a greater degree.” At the same time, O’Halloran believes “efficiencies generated by technology advances “will have a powerful depressing influence on the rate of inflation.”
O’Halloran summarized his view: “The tech revolution has created extraordinary wealth since the microprocessor came on the scene in 1960, with its influence becoming stronger with each passing year.” The “best lies ahead” over the next 10 years for those companies best able to harness the transformative power of technology, he believes, while “those who are on the wrong side of these developments will see the worst.”
Summing Up
Given the firm’s long-term orientation, Lord Abbett’s investment teams are continually examining the potential trends that may shape the investing landscape in the years to come. Of course, Market View will be following these developments closely, and will keep our readers up to date on how they may influence our thinking on economies and major asset classes—and our actively managed investment strategies across global markets.
1”The ‘Fire and Ice’ Decade That Changed Everything on Wall Street,” Bloomberg, December 27, 2019.
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Credit risk is the risk that debt issuers will become unable to make timely interest payments, and at worst will fail to repay the principal amount. Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes 1 5 in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.
There is no guarantee that the investment strategies discussed in this article will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
This material is provided for general and educational purposes only. The examples provided are for illustrative purposes only, and are not indicative of any particular investor situation.
This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
EM refers to emerging markets.
Fed refers to the U.S. Federal Reserve.
MiFID II is a legislative framework instituted by the European Union (EU) to regulate financial markets in the bloc and improve protections for investors.
Risk asset describes any financial security or instrument that is not a risk-free asset (i.e. a high-quality government bond). Risk assets generally encompass equities, commodities, property, and all areas of fixed income apart from high-quality sovereign bonds.
The risk premium is the rate of return on an investment over and above the risk-free or guaranteed rate of return.
Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure. A bond spread is often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point).
Taper tantrum is a term popularly used to describe the 2013 increase in U.S. Treasury yields which resulted from the U.S. Federal Reserve's use of tapering to gradually reduce the amount of monetary stimulus in the economy.
The Bloomberg Barclays High Yield Municipal Bond Index is an unmanaged index consisting of noninvestment-grade, unrated or below Ba1 municipal bonds.
The Bloomberg Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market.
The Bloomberg Barclays Global Aggregate Bond Index is a broad-based measure of the global investment-grade, fixed-income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate indexes. The index also includes euro dollar and euro/yen corporate bonds, Canadian government securities, and U.S. dollar investment-grade 144A securities.
The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Total return comprises price appreciation/depreciation and income as a percentage of the original investment.
The Bloomberg Barclays U.S. Corporate Bond Index includes all publicly held issued, fixed-rate, nonconvertible investment-grade corporate debt. The index is composed of both U.S. and Brady bonds.
The ICE BofAML U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market.
The ICE BofAML U.S. Treasury Bill Index tracks the performance of U.S. dollar denominated U.S. Treasury Bills publicly issued in the U.S. domestic market. Qualifying securities must have at least one month remaining term to final maturity and a minimum amount outstanding of $1 billion.
Source: ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofAML INDICES AND RELATED DATA ON AN "AS IS" BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofAML INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND LORD, ABBETT & CO. LLC., OR ANY OF ITS PRODUCTS OR SERVICES.
The J.P. Morgan Emerging Markets Bond Index Global ("EMBI Global") tracks total returns for traded external debt instruments in the emerging markets
The J.P. Morgan Emerging Markets Bond Global Diversified Index: The EMBI Global Diversified is a uniquely-weighted version of the EMBI Global. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indices comprising 23 developed and 23 emerging market country indices.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Russell 3000® Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 3000® Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values.
The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
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