Hindsight Hints at Hobbled Growth Through 2020

January 4, 2010

Epitaphs for the first decade of the new millennium, "the aughts," have now appeared en masse. They are mostly gloomy, and it is hard to disagree with this assessment. As we lay the decade to rest, we offer our economic review of the past decade, and a glimpse into what we might expect in the next.

For equity investors, an undertaker’s artful application of cosmetics couldn’t manage to make this dreadful decade appealing. Equity returns were dismal, faring the worst among asset classes. According to the Wall Street Journal1 this decade’s performance will go down as the worst in 200 years of U.S. stock market history, eclipsing even the lousy 1930s.

The S&P 500 suffered a decline from its value at Dec. 31, 1999, despite accounting for the reinvestment of dividends. In the United States, small cap stocks faired better, with the Russell 2000 rising a modest 3.56% annualized over the decade. Similarly, stocks in emerging markets outshone global developed markets quite handily. Late entrants to the tech bubble that peaked in early 2000, on the other hand, still have a lot of ground to make up after the NASDAQ’s decline of 40.65% over the decade.

The Aughts: Dec. 31,1999 through Dec. 31, 2009
Benchmark	Total Return	Annualized Return
S&P 500	-9.09%	-0.95%
Dow Jones Industrial Avg.	13.89%	1.31%
NASDAQ Composite	-40.65%	-5.08%
Russell 2000	41.98%	3.56%
MSCI All World Index	7.05%	0.68%
MSCI Emerging Markets	142.00%	9.24%

Investors may wish they had put most of their savings into bonds at the beginning of the decade, as the widely followed BarCap Aggregate bond index (known as the Lehman Aggregate until Lehman Brothers’ demise last year) returned 84.39%, or 6.31% on an annualized basis. The return from bonds over the decade nearly matched that from emerging markets, minus of course the gut-wrenching volatility of the latter.

The true standouts over the last ten years were commodities.

The Aughts: Dec. 31,1999 through Dec. 31, 2009
Benchmark	Total Return	Annualized Return
Gold	280.90%	14.30%
Oil	208.65%	11.93%

Average Weekly Hours vs. Percentage of Population Employed

Outside the markets, Americans faced two recessions during the decade — the most recent being the deepest of the post-war era — with an uncertain recovery taking shape. Real median incomes in the U.S. peaked in 1999 at $52,587 in 2008 dollars and had declined to $50,303 by last year. Making matters worse is the fact that as average hours per worker continued its long-term downward trend, the percentage of the population employed shrank sharply in the latest recession. Moreover, the construction and real estate jobs that fueled the otherwise lackluster employment growth earlier this decade will likely take several more years to rematerialize, and are unlikely to reach the boom-time levels in the foreseeable future.

Americans on average are working less than anytime in the past 45 years. Multiplying the ratio of people employed by the average hours worked yields a measure of hours worked per citizen (see chart below right).

Perhaps the 2.8 hours per week of additional leisure time the average American enjoys today as compared to the beginning of the decade would be more welcomed were it not accompanied by the decline in median income.

What themes can investors expect as we shift focus to the next decade?

The financial crisis and deflated housing bubble laid bare some deep structural problems in the U.S. that could weigh on future output. And the unprecedented response by the Fed, U.S. Treasury, and global central banks — though it appears to have done the job of stemming short-term damage — should have long-term consequences that will be difficult to predict.

The trade deficit, particularly with China, seems to be the heart of the structural problems. The U.S. spent much of the last decade trading away manufacturing capacity for cheap imports. The ensuing deficit was financed largely by China’s and Japan’s purchase of U.S. debt, which kept their currencies (and therefore prices of imported goods) from rising, while helping put the roof on U.S. interest rates that drove borrowing and house price appreciation.

The financial crisis has shackled borrowing, and the reversal of house price gains means Americans can no longer finance consumption through home equity extraction. Although the dollar’s weakness against currencies such as the Euro and Canadian Dollar could help boost exports, the soft-peg of China’s Yuan to the dollar will likely serve to maintain the trade deficit.

If borrowing is unlikely to fuel consumption as it did through much of the decade, what will take its place? Especially since zombie banks resurrected with government bailout cash prolong their lurch across the economic landscape.

The unsightly employment picture outlined above is likely to dim the chance of significant increases in U.S. manufacturing capacity and exports over the next decade. The decline in the percentage of population employed could mean that strong hiring in coming years would need to be accompanied by serious worker re-training, which could slow productivity, lower profit margins, and either cap growth, boost inflation, or both. For those wondering what possible catalyst could emerge in this anemic environment to raise the pulse of prices, the lower expected productivity of currently unemployed workers could be the ignition.

Rapid development of emerging markets, especially in those countries and regions not overly reliant upon exports to the U.S., may continue through the next decade. The downside is that continued vigor in these markets will likely keep upward pressure on commodities and resource prices, with inflationary or even geopolitical consequences possible.

In summary, as difficult as the last decade was for investors, we do not expect much of a reprieve in the near future. Our desire to celebrate the passing of "the aughts" is dampened by the specter of inflation and our immediate need to prepare for the angst of the twenty-teens. Though cautious in our outlook, we remain optimistic that our discretion will at least keep our investors in good stead.

Of the nine mutual funds that Saturna Capital now administers, seven were in existence at the beginning of the decade. All seven of these posted positive total returns, truly a low bar to set for bragging purposes, but more than can be said of the S&P 500, for example. Past performance, of course, is not a guarantee of future results. The chart at right shows each Fund’s total return over the decade and its annualized equivalent.

The Aughts: Dec. 31,1999 through Dec. 31, 2009
Fund/Benchmark	Total Return	Annualized Return
Amana Income Fund	76.37%	5.84%
Amana Growth Fund	30.39%	2.69%
Sextant Growth Fund	32.08%	2.82%
Sextant International Fund	60.62%	4.85%
Sextant Short-Term Bond Fund	55.60%	4.52%
Sextant Bond Income Fund	75.68%	5.80%
Idaho Tax-Exempt Fund	58.77%	4.73%
S&P 500	-9.09%	-0.95%

Past performance does not guarantee future results. Standardized performance current to the most recent month-end is available by following the links above or at our Average Annual Returns page.

¹ Lauricella, Tom. "Investors Hope the '10s Beat the '00s." The Wall Street Journal December 20, 2009. http://online.wsj.com/article/SB10001424052748704786204574607993448916718.html

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