Lost Decade for Stocks?

lf you were fortunate enough to buy the S&P 500 at the very bottom in October 2002, your investment would be up 68%. Unfortunately but most likely, 99% of investors didn't buy at the bottom. Instead, investors probably worked their way into long positions in 2003 and 2004 once the market proved it could sustain a clear uptrend.

Below we highlight the returns of an investment in the S&P 500 if you bought at the start of each year and held until now. As shown, unless you bought at the start of 2003, you'd have gains of less than 20% in all instances. And buying at the start of 2007 and 2008 would have resulted in negative returns.

Now, we're all familiar with the long-term historical performance of 6% to 8% annually for equities, but even during the most recent bull market of this decade, that hasn't happened unless you're timing was spot on. Any new market participants over the past few years have really just seen a lot of back and forth action.

click to enlarge

Below we highlight the returns of the Dow Jones Industrial Average by decade since 1900 (using 1901-1910, 1911-1920, etc.). At current levels, the Dow is up 12% since the start of this decade. That makes this the worst performing period since the 1930s, even worse than the 1970s (which many people would like to forget).

The S&P 500 has risen by 68% since October 2002. However, during that same period there are 71 stocks in the index that are actually down. Additionally, 14 stocks currently in the index have actually lost more than half of their values. As shown below, Tenet Healthcare (THC) tops the list with a decline of over 90%. Not surprisingly, all the remaining names on the list come from the Financials and Consumer Discretionary Sector.

Comments

[blah-blah]

That's a horribly skewed and meaningly comparison.

The 90s ended with a huge bubble that didn't burst until the beginning of the next decade. If you broke it up by different 10 years segments, it would look differently.

[Things ComeUndone]

Is this in inflation adjusted dollars?

[Things ComeUndone]

The Dollar was backed by gold in the 1930's. Today thanks to debt financing of the war the Dollar is declining. Would those facts impact the charts numbers?

[OregonRain]

I just looked at another analytical argument that we could be in a "lost decade for stocks." In essence what these people argue is that two things really drive stocks. That is real GDP and PE ratios PE ratios they argue are largely driven by inflation and inflation expectations. In a nut shell if you think that inflation is headed up...then PE ratios which are still high are going to come down. This makes the argument for a "lost decade."

I may have messed up their argument but check it out for yourself here. I have no connection with these guys at all. Just saw them mentioned in a WSJ article. crestmontresearch.com

Here is the mention in the WSJ

Ed Easterling, president of Crestmont Research, argues that record increases in earnings and profit margins in recent years make prices look artificially cheap. He prefers to look at the 10-year trends in earnings, from which he removes the impact of inflation and smooths out the short-term ups and downs in profit margins. That, he contends, provides a cleaner picture of stock valuations.

I would be interested in comments on this...and what they are saying along with our friends from bespoke

[jerry p]

Blaming the decline of the USD on the war is ignorant. The USD started its decline when Greenspan lowered the rates to 1% and is crashing again because Bernanke is headed back to 1% due to the credit problems. I wish you idiots would stop trying to tie every event in the world to Iraq. People did not borrow beyong their means because of Iraq. Banks didn't make bad loans because of Iraq. You did get a flat tire because of Iraq. While the Iraq war has been expensive and a huge waste of resources, it is not the cause of all the world's problems.

[sammyg123]

The cost for the war in Iraq is a drop in the bucket compared to our GDP, and will cost less than the subprime crisis and credit crunch when all is said and done. Potential losses from the subprime crisis could be over a trillion dollars according to some. So, if you want to complain, then look no further than institutional financial irresponsibility and moral hazard.

The war in Iraq costs about 100 billion per year. This is a lot of money, of course, however, at least there is something to be gained out of the Iraq war. It is arguable that risking a few hundred billion to improve the status quo in the world order is worth it for the US, as we are the hegemon. Of course, things may not get better, and it may turn out the the Iraq war was folly and not worth it at all.

Regardless of economics and stock market profits and lossess, I revere our soldiers' sacrifices in Iraq, and I sincerely hope that their sacrifices were not in vain. So, let's leave the Iraq war out of it. War is the cost of a country's business, and such things are pursued towards furthering a nation's interests.

If you think that the nation's interests are less important than a stock's PE ratio, or the balance of your investment account, then perhaps it would be best to simply anticipate market moves based on your convictions, and let history decide what is right or wrong. Let the pentagon do it's job. Yes, it will cost us, but I'd rather we preserve our hegemonic status and enjoy the fruits of that then surrender to head-chopping cave-men who worship blood.

I would give all of my money up if it meant that my country and my family are safe for generations to come. If that means our recession lasts a little longer, SO BE IT. It's a small price to pay as long as we remain free, and under OUR RULE OF LAW, not theirs. If you think things are bad now, just wait until you start paying taxes to practice Christianity or Judaism to the head-chopping Islamo-fascists. Don't believe in God? OK, well, then you don't have to pay religious taxes. They just kill those kinds of infidels.

The war in Iraq, dear friends, puts the fight in the middle-east, where it belongs. Better that than war in our streets. Concerned about your house price? Well, terrorist acts are not good for real estate prices, that is for sure. Remember, there are soldiers out there fighting to make sure that our way of life, including our economy, has a future in this world.

The stock market, and all investing, is subordinate to global stability. If you don't believe that, then have a look at the price of gold and oil. It's pretty easy to assess that as global instability increases due to our "friends" in the middle east, the higher prices for these two commodities will go. This global instability will continue whether we withdraw from Iraq or not. If we are successful in Iraq, stability will return to Iraq, and spread throughout the middle east. Figure it out for yourselves. Either we fight them where they live and win, or they will fight you where you live and you personally will lose. That's just a cold fact. Success in Iraq means "stability" dividends, to which your precious stock market will respond quite kindly.

Of course, there are those dogmatists who believe that the war in Iraq "is all about oil." Wrong. It's all about global stability in general. Perhaps you think that we created instability in Iraq? Oh, ok, well, then research Saddam's financing of Fedayin Saddam - his international terrorist group financed with oil money. If you think Al Qaeda is bad, then imagine a better trained, better financed state terror group and what they could accomplish with rich Saddam's financial support! International affairs is a complex business, and decisions to go to war, regardless of the WMD market, are complex and involve thinking over time periods that span generations. Investors concerned with profits must take this into account when they make investment decisions. If you can't see the ramifications and inevitable consequences of globally strategic moves, then I am afraid that you are swimming in dangerous water when it comes to finance. I pray that history will show the decision to go to war in Iraq was correct. If you or I end up losing money because of bad investment decisions based on our limited understanding of global events and their consequences in the financial markets, well, then, too bad for us. Cry me a river, or learn from it. These financial catastrophes that we see today are not the last. Just be thankful that someone, somewhere, is trying to protect our way of life. Read "Black Swan" by Nicholas Nassem Talib, and learn from a genius.

Here's a question: What the next inevitable crisis? How should you position your "investments"... based on this? Instead of crying about the Iraq war, prepare yourself for the next shoe to drop. It will definitely drop. Wars will happen, financial crises happen - these things are bigger than us all. Sit and point fingers all you like, or move on, adjust, improvise, and exploit.

Or, continue to be baby and blame everything on Bush and the Iraq war. Silly liberals, finance is for capitalists.

[assparagusman]

Mr. Blahbla,

The author starts his article by stating the 90's bubble bursted in Oct 2002 and points out any investing at that time would be up 68% vs. 12%, per his chart. Any way you look at this, the last decade sucked, unless your timing was perfect as he says. What is your point exactly?

[CM in MA]

For some, it's potentially worse than the authors illustrate. If a person had the worst timing in the world, and invested in the S&P 500 at the start of year 2000, their annualized return (including dividends) to date would be 0.03%. Of course, this means that if the first 20 years of this century are going to revert to 8% return levels, then there's going to be a heck of a bull market sometime during the next decade. For those wondering, to get approximately 8% annualized during the period 2000-2020, the S&P would need to reach roughly 6600 by 2020. To get 8% annualized from 2002-2022, the S&P 500 would need to reach just 3725. As Warren Buffett has long noted, the price paid determines the rate of return.

[FRANKGUNNELS]

Greetings
Even as the wars have cost the taxpayers (some money )they have also kept their neighbors working and contributing to the tax base. What is the net cost?

[reducemytaxes]

Sammyg123 - Impressive and if that was the first time you have expressed those thoughts in writing, amazing.

Things come Undone - Debt financing of the war? It's ironic that you attribute debt spending to the war, instead of, I don't know, an entitlement program such as welfare which has a FY08 budget of $271B. Liberals always make sense until you consider logic and profit.

[WAKEUP]

sammyg123: "...it may turn out the the Iraq war was folly and not worth it at all." It's doubtful that Halliburton executives and stockholders think of the Iraq War (and some other wars) as anything more than a successful business venture, well-thought-out and perfectly executed. No, I do not own Halliburton stock.

[Is All Well?]

sammyg123,

I enjoyed your thoughtful presentation. For your arguments to work we need competent leaders: Republican, Democrat or other. Given their idiotic subservience to ideology uber alles, is there any hope in either of our political parties? This will be the undoing of this country unless we elect someone who has the audacity to search for a different path. Can anyone be as wretchedly wrong-headed and close-minded as our current "fearless" leader???? Maybe.

GW had our adversary bin Laden pinned down in Afghanistan after we took on the Taleban after 9/11. If we had kept him and his pals pinned down in that region, they might still be there in their mountain tunnels paid for by our previous "smart" leaders who were paying him to slay the Russians. Given the terrific hideouts that the CIA financed for him in the mountains of Afghanistan, we might still be looking for him and his henchmen there...BUT not across the entire globe and with the even larger bands of extremists that they have spawned since GW, RC and DR et al. got distracted by some other agenda.

You may be right about the need to fight a war at times, especially when attacked...but let's finish one war before we start another. Too bad Mr. McCain, a proven war hero, allowed a vagabond military-evader like GW, out-maneuver him in 2000? Is this the character we want in our next leader? Courage in the face of a challenge to the homeland? I dare say that Mr. McCain might have been able to make a difference in our military response to 9/11 had he been a real patriot and stood up to the Rovian Bush machine WHEN HE SHOULD HAVE. He might have prosecuted the search for bin Laden that the military leaders favored. Too late for that now, Senator!

Hilary Clinton is more of the same old same old. This is her last shot, given her age, to go down in history with her husband as being the only couple to swap positions in the White House. I wonder what she can achieve in the Oval Office, or the corridors nearby. Ego uber alles.

What is America's choice? No doubt we will get what we deserve, hasn't it happened like that most recently? How does the American voter take back some control in electing a leader in whom it has confidence? Perhaps every ballot with a choice of "None of the Above" will be a start to getting some accountability. Can it be possible that “None of the Above” might come out a winner in some election choices we are given. Best of luck to us, since our ensconced solons are loathe to dethrone themselves.

I agree that money is irrelevant in the face of crisis. We have a major crisis in leadership that has been unfolding for some time now...not just the financial mess that greedy players have been allowed to contrive.

My ideal ticket...Michael Bloomberg/Barack Obama or vici versa. It is time for some fresh ideas. Is America ready?

[sammyg123]

Thanks for all of your kind responses. I don't think that we are in debt because of the Iraq war, or just because of it. The vast majority of our debt comes from unbridled government spending, and I lay that at the doorstep of congress and our President. I like our President's nerve and I agree with the Iraq War, regardless of the cost. I don't agree with his spending program, but I think he compromised with congress and agreed to their spending as long as they also spent on the Iraq War. This was a mistake, but understandable. Our President's main responsibility, according to the constitution, is to conduct our foreign affairs. You may not like his attitude in foreign affairs, but he did show strength to our enemies. Al-Qaeda, and all of its relative and associated groups, only understand strength. I shudder at the thought of some amateur coming to run our country, who wants to "talk" with the people who murder our citizens. Of course they want to talk, and they will continue using violence to intimidate us as we "negotiate" with them. That's the way these "people" work.

Anyway, thanks again for reading what I wrote. Sorry about being so long winded.

[sammyg123]

And as for pinning down Usama Bin Laden, have a look at the map of Afghanistan some time. I think it's obvious that he Osama wasn't pinned down - he got away.