It seems like just yesterday: I was filling up at was then a Mobil (XOM) station in 1998, pumping my $0.79 per gallon gas. I couldn’t believe how inexpensive it was and was trying to figure out how to lock in that price for the rest of my life (oh well). Stripping out the taxes, the price was closer to 50 cents. Then again, oil was close to $10 per barrel. Those were the days.
Of course, the world was rapidly becoming immersed in the expanding global economic crisis, with emerging country debt spreads exploding and currencies tanking. Russia was going to default, and Long-Term Capital went from having its clients refuse to take back principal to losing it all in just a matter of months.
10 years later, oil has increased eleven-fold and gasoline has quadrupled. What I find most interesting, though, is that the 10-year return on stocks is approximating zero. On 3/16/98, the S&P 500 (SPY) closed at 1099. Ten years later, with the recent close at 1288, the total appreciation, excluding dividends, has been 17%. Rarely in our lives has the stock market had such a puny return over a decade. If my projections are correct that we hit a low of 1170 or so later this year, the return could equal zero or go slightly negative in 2008 or early 2009. What headlines that will make!
As you can see in the chart above, the return has dropped from a peak of over 350% at the peak to almost zero. The last time the broad index return for a decade was this low was the early 80s. The source of this data, by the way, is Yahoo!. The data for the Dow Jones Industrial Average (DIA) goes back to the Great Depression and shows similar low returns from the 70s to the 80s, but illustrates the very negative returns in the 1930s.
Where am I going with all of this? The press will have a fun time with this, with the general public finding out what a bad bet stocks have been for a decade. If one assumes a year-end price equal to where we are now, the return will actually be about zero (I project a slightly lower price of about 1220 at year-end). While the press will be slamming stocks, I think that they could be quite the bargain (compared to 10-year Treasuries yielding 3 ½%). True, unless the market rallies quite strongly, the 10-year returns will get pretty negative due to the “tough comps”. Looking at the 2000 peak of 1553, if the market doesn’t move from 1288, the 10-yr return would be almost -22%. The worst return for the entire data series was -25% in the summer of 1974 (near the end of a horrible bear market). The average return on rolling 10-year periods monthly has been 128%.
Given the maturity of our economy and the low interest rates, I would expect a slightly lower return. Compounding 7% over the next 10 years will result in a price return of 97% (excluding dividends). Don’t let the articles later this year keep you from being involved in what is likely to be a good investment!