By now you've probably seen countless headlines and news reports, proclaiming that stock investors lost money this past decade. Stories herald the fact that this is the first decade, since data began in 1926, in which the S&P 500 Index produced a negative return. Although it may be the first negative decade, it is not the first time the market produced a negative return over a ten-year period.
While the U.S. stock market made a substantial turnaround in 2009, up 26% for the year compared to the 38% loss in 2008, the rally wasn’t enough to restore the money and confidence lost during two bear markets. Fueled by an Internet bubble, the collapse of WorldCom, Enron, AIG, Lehman Brothers and countless others, a housing crisis, a credit crisis, and more than $1.7 trillion in global bank losses, the S&P 500 fell roughly 10% for the decade, an average annual decrease of 0.9%.
With that said, the recent focus on the past decade’s performance may be somewhat overstated. First, most equity investors should have a time horizon that is longer than 10 years and certainly no less than 5 years. A decade can be a short time period for anyone who will need their money at the end of it. Also, the past decade's performance began at a moment in time when stocks were particularly overvalued. A year or two from now, the 10-year performance figures may not look so bad, especially when the time period begins in 2001 or 2002 when the S&P 500 was at lower levels. Additionally, most of our clients do not have all of their money in stocks, but in balanced portfolios. Their returns were certainly not the same as the over-all stock market. And finally, for those fortunate enough to be saving (buying) during this period, their results may have been quite different indeed.
As hard as it may be to ignore short-term fluctuations in your portfolio, it’s the long term results that should matter most to investors. Money committed to stocks should not be needed anytime soon and that is one more reason most investors should have a balanced portfolio consisting of stocks, bonds and cash. If you consider that the average investor could reasonably be investing over a 45-year time period things may not look too bad. According to research compiled by Vanguard, the S&P 500’s worst 45-year run produced an average annual return of 6.53%.
What's in store for 2010
The U.S. budget deficit reached a record of $1.4 trillion in 2009, driven by the cost of bank bailouts and benefits after 7.2 million jobs were lost since the recession started two years ago. According to the U.S. Treasury, the Government’s total debt is now more than $12 trillion.
The U.S. economy returned to growth in the third quarter of 2009 following a prolonged slump tied to the recession. As for the nation's gross domestic product, which measures the economy in terms of all goods and services produced within the U.S., the consensus among economists is that it will grow at an annual rate of 2.8% in 2010. The Federal Reserve sees a moderate economic recovery in 2010 as tight credit, rising foreclosures and commercial real estate woes keep a lid on growth, said Fed Gov. Elizabeth Duke.
Last month, the Fed stood by its commitment to keep interest rates close to zero for an "extended period." While some believe that the Fed will need to raise rates sooner rather than later as the economy stabilizes and strengthens, most economists polled by Reuters do not expect the Fed to raise interest rates before the end of the first quarter of 2011.
An analysis of the six previous recessions shows that the first year of a cyclical bull market is typically the strongest due to investor sentiment being so negative before the rally starts that good news is a positive surprise, turning investors from bearish to bullish. Market returns during the second year of a bull market tend to be more modest as investors are generally still positive but good news is no longer as surprising. The markets also tend to be more volatile because policymakers begin to remove some of the stimulus that fueled the rally during the first year.
Looking Forward
"Now I’m looking at the world through a windshield, and see everything in a little bit different light…" – Lyrics by Jerry Chesnut and Mike Hoyer
It's always better to drive a vehicle looking through the windshield rather than the rear-view mirror. So it is with life and with investing. While we're not out of the woods yet, we're getting closer. No one knows which asset class will outperform the others over the next 10 (or 45) years. What's important is to reflect on your current situation and goals for the future and to choose a properly diversified portfolio that complements your time horizon, return expectations, and your capacity and tolerance for risk. Then have conviction in your decisions and remain persistent.