As the 2010s draw to a close, the global economy is in a very different place at the decade’s end than at its beginning.
Many of the sociopolitical events that took place around the world were reflective of the financial world. Analysts say the election of Donald Trump in 2016 was the catalyst for significant change in the U.S. economy and the global economy — but his rise was as much an effect of broader forces at work as it was a cause of these movements and moments that reshaped the economy over the last 10 years.
Eurozone in crisis
In the wake of the recession, unsustainably high deficit and debt levels in several European countries led to a crisis requiring the intervention of third-party financial institutions, such as a 2012 bond-buying program implemented by the European Central Bank to tamp down interest rates on sovereign debt, which were rising as investor confidence shrank.
The crisis was most acutely felt in Greece, which had its bond rating slashed slashed to junk status after it was revealed that the government had seriously misrepresented its debt burden. Leaders agreed to sharp austerity measures in return for bailouts from the Union and the International Monetary Fund. In the subsequent backlash and public protests against Greek austerity measures, there was speculation that the country might leave the Eurozone entirely.
Some say these events were a precursor to and a catalyst of Britain’s 2016 vote to leave the Eurozone. “Brexit is kind of the natural outcome of… when Greece was basically held hostage,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. “They were forced into a multi-year depression in order to save the Euro.”
“Obviously, Brexit opens up the possibility more concretely that European countries can leave their union and I’m sure that’s going to have all kinds of ramifications,” said Mark Zandi, chief economist at Moody’s Analytics. With nationalism growing in prominence, he predicted that the Eurozone will face a continuation of these challenges in the coming decade.
Nationalism hits trade
The 2010s were marked more broadly by a surge of populist and nationalist sentiment both in the U.S. and elsewhere around the world — a sentiment that is fundamentally reshaping trade between countries and changing the calculus for multinational corporations.
“We’ve seen this rise of nationalism... which is a political issue reshaping financial markets tremendously,” said Joseph Heider, president of Cirrus Wealth Management.
For roughly half a century, business and industry labored to build manufacturing and production facilities and supply chains to take advantage of the availability of raw materials, cheap labor and lax environmental regulations, all in a relentless drive for efficiency. Now, that commercial infrastructure is under strain.
Trump’s decision to pull the United States out of the Trans-Pacific Partnership and start a trade war with China is the most visible and consequential manifestation of this trend, with his on-again, off-again threats to impose tariffs on Europe, Mexico and other trading partners a close second.
”Politics is now taking primacy over economics. Over the past several decades, we’ve been building an economically optimized world. Right now that is no longer the case,” McMillan said. “Political economy is now being prioritized over economic efficiency, and that’s something we haven’t seen for decades. That takes us back to the 50s.”
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To prop up the economy in the wake of the financial crisis, the Federal Reserve initiated monetary policy with little precedent in modern times. It held interest rates at zero for an extended period of time and undertook enormous quantitative easing programs to pump liquidity into financial markets.
“The decade was really remarkable in the sense that for the first six years of the decade we had zero percent interest rates and for the first five years we had quantitative easing,” said Dan North, chief economist at Euler Hermes North America, characterizing the central bank’s activities as “a wild monetary policy experiment.”
Some market observers defend the Fed’s interventionist streak, particularly at the start of the decade, with the financial crisis still fresh in people’s minds.
“The biggest thing in the last 10 years is the continuation of quantitative easing. Without quantitative easing, I think everything would be drastically different, way worse than things are now,” said Mitchell Goldberg, president of ClientFirst Strategy.
In hindsight, some question whether the Fed was too accommodative — a stance that could have ramifications for the next recession. “When the Fed cut interest rates to the unprecedented level of zero to 0.25 percent, nobody expected it was going to last the seven years that it did,” McBride said.
“We’ve had way too much easy money for way too long, and at some point it’s going to come back and get us,” North said. This leaves the Fed with fewer tools at hand to boost the economy, he said. “We’re leaving very little room for the next recession.”
Tax cuts lead to buybacks
Republicans’ sweep of the 2016 election facilitated the passage of a massive corporate tax cut. Financial experts say the passage of the Tax Cuts and Jobs Act at the end of 2017 had positive results initially, but those short-term gains could come at the cost of long-term pain.
“Trump got elected and went on a path of reducing regulation,” North said. “I think, honestly, the reduction in regulation has helped the economy and I think the tax cut helped the economy as well,” he said, but he added that since economic growth fell far short of Republicans’ forecasts, the stimulative effects of the tax cut have faded and the national debt has ballooned — a risky combination.
“It’s putting America on a less stable financial future because of the structure of this unfunded, non-sustainable tax cut,” Crowley said.
Proponents of the the tax cuts predicted that companies would spend their windfalls expanding and investing in production facilities, technology and human capital. Instead, the cuts spurred a wave of corporate stock buybacks, which helped propel the market to new record highs, but also potentially limited the broader impact the tax cuts were intended to have.
“It’s in part a reflection of the fact that there may be, in some sectors more than others, limited investment or acquisition opportunities or a lack of appealing valuations on those that make a buyback a more palatable way to boost earnings per share,” said Greg McBride, chief financial analyst at Bankrate.com. “Every dollar that’s going into buybacks is a dollar that’s not being used for another form of expansion,” he said.
Share repurchases have also contributed to stock valuation gains, but investing experts warn that this inflation can distort markets. “More dollars chasing fewer stocks because of all the buybacks isn’t something you want long-term investors to hang their hat on,” said John Lynch, chief investment strategist at LPL Financial.
Stock market highs
The increase in buybacks is one factor that has contributed to the record-long bull market, a meteoric rise virtually no one would have predicted 10 years ago. When 2010 began, the stock market had already begun the long climb out of its recession-era hole, but the mood was still pessimistic.
“The decade started off very ominously,” Zandi said. “We began the decade not knowing that the crisis was over. We’d just suffered the worst economic downturn since the 1930s Depression. The recession was over officially by June 2009, but it wasn’t quite clear that we were out of it.”
Since then, of course, stocks have smashed through one record high after another, with valuations boosted by both monetary and fiscal policy.
McBride said the Fed’s trio of rate cuts in 2019 reversed the correction that took place at the end of last year, sustaining the bull market for a record-setting 10th year. “That helped cushion the broader economy but it’s also helped juiced the equity markets. Lower interest rates make other investments less appealing,” he said. “That enhances the appeal of equities relative to bonds or cash.”