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Equities, real estate won big in the decade of 'risk-on'

Equities and real estate were the big winners in a decade characterized by cheap money and fiscal expansion, as risk-seeking investors in U.S. assets were rewarded with strong returns.

The "teens" were an era of ultra-loose monetary policy, with the Federal Reserve's target rate spending the majority of the decade close to zero, and rising no higher than 2.5%, while the central bank's quantitative easing program swelled its balance sheet to as much as $4.5 trillion in 2015, juicing credit markets.

The result was to encourage risk and, as a result, of the four asset classes tracked here by S&P Global Market Intelligence (equities, real estate, bonds and commodities) the S&P 500 performed best.

"The bottom line was, if you were in it, you did well," said Howard Silverblatt, a senior index analyst at S&P Dow Jones.

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Cheap money and a free-spending consumer sector have supported the longest-ever bull run in U.S. equities, on track to reach 11 years in early March. The S&P 500 index gained 190% in the decade, a considerably better performance than in the first 10 years of the century when the 2008 financial crisis left it 24% lower in the period. It could not beat the 1990s, however, when the index surged 315.7%.

The Dow Jones U.S. Real Estate Index was largely performing in line with equities until mid-2016, but tailed off as the Fed started to raise rates.

Both assets took a hit at the height of the Fed's hiking cycle in December 2018, with the prospect of further rate rises knocking as much as 12.9% off the Dow Jones Real Estate Index and 15.7% off the S&P 500, before the Fed reversed course and they began to recover later in the month. As rates fell back to 1.5%-1.75%, real estate almost matched the S&P 500, gaining 24.1% in 2019 as opposed to the 28.9% gain in equities.

Not-so-super cycle

Commodities ended the decade strongly in 2019, with the best annual return in 2019 since the pre-crash commodity boom as sanctions to Iran and Venezuela boosted the price of oil. But across the decade, the S&P GCSI index was down 16.75%, having slumped by as much as 54.45% in February 2016 as slower economic growth in China weighed on global demand.

The rapid economic growth of China in the late 2000s resulted in a commodity boom as massive investment in infrastructure sucked in global resources. But as the world's second-largest economy slowed its pace and sought to transition away from this investment-led approach, demand dried up.

Quantitative easing in the U.S., Japan and Europe has also limited returns from the bond markets, with investors forced into lower-rated debt in a hunt for yield. The Bloomberg Barclays U.S. Aggregate Bond Index gained just 8.8% over the course of the decade.

Yet there remains demand for bonds heading into the new decade. Axa Investment noted in its end-of-year report that "bonds look expensive" with credit spreads near historic lows. However, corporate defaults are not expected to be a concern "at least in the first half of 2020" which makes high-yield credit attractive.

The prospect of further easing by the Fed is another signal for investors to move into bonds, with spreads to Treasurys likely to widen.

"The bar for further easing from the Fed keeps getting lower. [U.S. credit] is a good defensive posture to hold in portfolios," said Scott Mather, chief investment officer for U.S. core strategies at Pacific Investment Management Co., in a webcast.