US stocks in lost decade?

Recently, one of the members of SG Wealth Builder wrote in to seek my opinion on the outlook for US stocks. Apparently, there is a lot of literature floating around stating that US stocks are in for a “lost decade”. As a matter of fact, even veteran investor, Charlie Munger, has weighed in and mentioned something to that effect.

How does a lost decade for US stocks affect retail investors and what sort of actions should we undertake against such backdrop?

US stocks

This is not the first time that someone suggested that US stocks are poised to suffer a massive correction in 2021. In fact, a few members had expressed concerns that a “holocaust” for US stocks could be looming given the recent record highs of Dow Jones, S&P 500 and NASDAQ. Should investors run for their lives?

Obviously, no one can predict the future and trying to predict the future directions of US stocks is getting difficult nowadays with so much volatility ongoing in the market. Nonetheless, in this article, I will share a balanced and pragmatic outlook of US stocks.

Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in US stocks. Thus, this article is not meant to induce readers to make any form of investment decisions.

US stocks to reset for new order?

To put things into perspective, the US is the world’s biggest economy, with GDP of USD21.4 trillion in 2019. In view of this, a downturn for the US financial markets would likely have a significant impact on global economy. Following the Great Financial Crisis (GFC) in 2009, the past decade had been relatively “uneventful” for US stocks, until COVID-19 struck in 2020. This is unlike the decade spanning across 2000 to 2010, a chaotic period which saw the bust of dot.com bubble, the 9/11 terrorist attacks, SARS outbreak and the GFC. That dark decade had caused most US stock indices to suffer a terrifying lost decade.

Will we be seeing another lost decade for US stocks? Indeed, the pandemic has been a major disruption to the whole ecosystem. But then again, it could be a massive game-changer as businesses accelerate the digitization of their operations. If investors observe carefully, the bull run of US stocks from 2010 to 2020 coincided with the rapid proliferation of smart phones, lifestyle technologies and e-commerce platforms. On this note, I am of the view that rapid digitization and technology developments will hold the key in the performance of US stocks going forward.

Amid the changes taking place, 2021 should mark the year when global businesses across various sectors start to recover from the devastating impact of COVID-19. But it could be a number of years before most businesses recover back to pre-COVID-19 levels. So in terms of business fundamentals, the growth for most companies should remain weak for the next few years.

To complicate matters, the huge US stimulus packages and loose monetary policies had led to plenty of hot money flowing into US stocks. As interest rates are going to remain depressed for years to come, many investors started to pile into US stocks as they look for better returns. This phenomenon resulted in stock valuations getting ahead of business fundamentals for many US stocks. In my opinion, I do not think that such a situation is sustainable. Therefore, a correction for US stocks should be considered time opportune and healthy.

Despite the volatility expected for US stocks in the next couple of years, I do not foresee a lost decade for US stocks. Instead, the US stock market could see a reset, pivoting towards a new world order.

Under the new normal, those companies whose business models are still entrenched in the old economy would find themselves struggling to stay afloat. In Singapore, we are seeing retail outlets closing shop amid the stiff competition from online platforms. Keppel Corp has announced its exit from oil rig building businesses and pivot to renewable energy. SingPost is restructuring its business focus to that of logistic provider as firms reduce mailing usages. SPH is also expediting its effort to digitize its business as newspaper readership plummeted in recent years.

What is your game?

Truth be told, it does not matter if it’s really going to be a lost decade for US stocks. Of more importance is your investment strategies if it does happen. One thing to highlight is that while major US stock indices (Dow Jones and S&P 500) did suffer a lost decade in the period 2000 – 2010, the performances of the US indices had not been stagnant. This means that there had been numerous volatilities which saw the indices going up and down but eventually settling down at a lower point a decade later.

The multi-year downtrend suggests that there are plenty of opportunities for investors to make money from the downturns or upturns, depending on the strategies undertaken. To be successful, one needs to have self-awareness on his risk appetite and applies the appropriate risk management. The key is not to be too greedy and invest in monies in which you can afford to lose.

The recent saga of GameStop revealed that there is a new wave of millennial investors willing to take on excessive risks. Many of them have no qualms buying into penny stocks that lack fundamentals, thereby pushing the market to new heights. The desire is of course to make quick bucks without working hard for money. But such euphoria could potentially create a stock market bubble, resulting in an explosive market meltdown. It is this group of investors that worried me.

If you think the US stocks are in for a lost decade, one possible strategy is investing in Exchange Traded Funds (ETFs) that track Asia indices. Over the next decade, my view is that Asia will continue to outperform and enjoys higher growth than US. Hence, it would make sense to invest in ETFs with focus on Asian markets if you think that US stocks will suffer a lost decade.

There are several advantages in investing in exchange traded funds. Firstly, if you have limited capital but would like access to blue chips, then ETFs offer a low cost and simple way for you to own index stocks. For example, Nikko AM Singapore STI ETF offers investors an opportunity to invest in the top 30 companies listed to SGX.

Secondly, retail investors do not need to spend their precious time doing research because ETFs will passively track the performance of the index. If the index increases, you make money. Conversely if the index plunged, you incurred paper losses. Very simple and straightforward.

Another time-tested strategy is diversifying into other assets other than US stocks – cryptocurrencies, gold and real estate.

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Conclusion

Arising from the pandemic, there will be winners and losers. Those companies that can innovate will continue to thrive while those which can’t, will just die off. Even though US stocks may suffer a lost decade in general, there will be stocks that will outperform the rest. The trick is to sieve out these winning stocks and make them part of your portfolio.

Past performance may not be a good indicator of future performance. Thus, it may not be appropriate to use historical trends to predict whether US stocks will suffer a lost decade. This is especially so in today’s context. Social media, Internet-of-Things and robo-advisers have changed the way we live and invest dramatically. But one thing for sure is that it will be very difficult to achieve higher returns as compared to the past because of so many smart guys in the market and the ease of information access through the Internet.

Does the above mean that you should avoid investing the stock market altogether? Absolutely not the case. Given that inflation will erode your purchasing powers, you stand to lose more if you don’t learn how to navigate the stock market. It is not going to be an easy journey. Then again, making money is never easy. Learn from your mistakes and make sure you build adequate safeguards against catastrophic losses. Till then, enjoy the ride.

Updated: February 22, 2021 — 12:41 pm

1 Comment

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  1. I doubt it will be a lost decade like the 30s, 70s, or 00s. But US returns may lose out to ex-US due to valuation high base & mean reversion.

    I’ll only start worrying about a lost decade when we get nearer to 2030.

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