January 5, 2009
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Introduction
In April of this year I started writing about the miserable stock markets we’ve experienced in this first decade of the 21st century, suggesting that things might even get worse.
They have, big time.
We are experiencing the worst decade ever in stock market history, at least so far. In this end of year commentary, I update my earlier observations. The story below is pretty much the same as what I have been telling over the last several quarters, except things have gone from bad to much worse with each new revision. Frankly, I’m tired of telling this decrepit decade tale. Let’s hope 2009 is more upbeat.
It’s taken all the running we can do to lose ground
Unless there’s a significant rally in 2009, the 2000s will prove to be the worst performing US stock market decade ever, actually losing money for the first time. It will take a whopping 40% return in 2009 to make investors whole for the decade. The following chart shows the returns of the past seven decades, and the nine years to date through December 31, 2008:
Here we are, 90% of the way into the first decade of the 21st Century, and US stock market investors have lost money. The S&P500 has lost 4% per year on average in the past 9 years, reminding us what risk means. The graph below puts this disappointment into further perspective. Years like 2008 have happened before, but fortunately not very often; 1931, 1937 and 1974 are the only other years with real losses in excess of 30%. The S&P500 was down 37% in 2008. Note also that only two of the past nine years (shown in red) -- 2003 and 2006 -- were reasonably good. By contrast, you can see how good the 1990s were, shown in green. Perhaps the good news is that the historical odds for earning that 40% in 2009 are a little better than the odds of seeing another 37% loss. We’ve had 5 years in the plus-40% column, versus 4 in the minus-30% column.
83-Year Return History of S&P500 (Adjusted for Inflation): 1926-2008
Average Annual Compounded Real Return = 6.4%
Investors would have been far better off in bonds or Treasury bills than in stocks. Do you think the next year 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 nine years is foreign markets, which have returned more than 3% per year, although they too have suffered recent losses. Similarly hedge funds have also protected reasonably well, although they lost somewhat in 2008. In the following we focus on the more recent past, namely the year 2008, to manage and understand the recent pain.
The ride to disappointment has been bumpy. First the bubble burst in the three 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 14 months took all of that back, and more, with the S&P plummeting 40% from 11/1/07 through 12/31/08.
As painful as the last 14 months have been, we can still learn from this experience. This is the kind of period that serves to stress test those investments that are supposed to be good defensive plays, and to evaluate how well our professional investment managers have held up. In the following we review various market segments and strategies, to show what worked in the year 2008 and what did not. What sectors, styles, and countries have performed best and worst? The bottom line: nothing worked, but some market segments suffered less than others. And how about those poor old folks who are retired, and living off their savings?
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