It’s taken all the running we can do to stay in the same place

Unless there’s a significant rally in the next 18 months, the 2000s will prove to be one of the worst performing US stock market decades, the likes of which have not been seen since the 1930s. The following chart shows the returns of the past 7 decades, and the 8.5 years to date through June 30, 2008:

Here we are, 85% of the way into the first decade of the 21st Century, and US stock market investors have barely broken even. The S&P500 has returned a measly 0.1% per year on average in the past 8.5 years, small enough to be just noise. The graph below puts this disappointment into further perspective. Investors would have been far better off in bonds or Treasury bills than in stocks. Do you think the next 18 months will bail the decade out, or bring more of the same? Where can we invest and be safe? One place that would have helped in the past 8.5 years is foreign markets, which have returned more than 8% per year. Similarly hedge funds have also protected reasonably well. In the following we focus on the more recent past, namely the year 2008 to date, to manage the recent pain.

The ride to disappointment has been bumpy. First the bubble burst in the 3 years 2000-2002, and from there the stock market clawed its way back so that investors had earned a 3.5% per year return as of October of 2007. We were back even with inflation. But then the next 8 months took all of that back, with the S&P losing 16% from 11/1/07 to 6/30/08.

As painful as the last 8 months have been, we can still learn from this experience. This is the kind of period that serves to stress test our perceptions of what investments are good defensive plays. In the following we review various market segments and strategies, identifying what has worked in the year to date and what has not worked. What sectors, styles, and countries have performed best and worst? Did hedge funds protect? And how about those poor old folks who are retired, and living off their savings? This year is half over. Recent lessons can help us deal with the past and plan for what is still left.

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