A Terrible Decade for Stocks -- and Reason for Optimism

It's true: Many investors would have been better off had they put their cash in a money market fund and gone to the beach over the past decade, rather than invest in stocks.

In January 2000, the S&P 500 Index stood at about 1,425. As I write this, it's at 1,120.

If you started investing 10 years ago, you probably want to throw up right about now. To think that the amount of effort and stress that goes into investing has been rewarded with a big, fat nothing is depressing. It's humbling. It's discouraging. It can completely bodyslam your faith in investing. I hear you loud and clear.

What it should not do, however, is ruin your outlook for the next decade. Quite the opposite, in fact.

Even though the past decade brought negative returns, we need to acknowledge three important points:

  1. This isn't the first time it's happened.
  2. It's never happened two decades in a row (if we start with base years, '00, '10, '20, etc.)
  3. The ensuing decade after a negative return decade has been consistently quite good.

Going waaaay back
Yale economist Robert Shiller keeps a database of S&P 500 prices going back to 1871 (bless him). Taking his data and breaking it into 10-year periods yields the following returns:

Period

S&P 500 Return

1880-1890

5.28%

1890-1900

13.38%

1900-1910

65.25%

1910-1920

44.75%

1920-1930

145.87%

1930-1940

(43.34%)

1940-1950

37.24%

1950-1960

243.78%

1960-1970

55.63%

1970-1980

22.80%

1980-1990

206.56%

1990-2000

319.33%

2000-2010

(21.39%)*

2010-2020

?

*As of Dec. 23.

Of course, you can tweak the starting year and come up with different results. But in general, the pattern isn't too different. For example, starting with the fifth year of each decade:

Period

S&P 500 Return

1885-1895

0.24%

1895-1905

98.35%

1905-1915

(11.27%)

1915-1925

41.44%

1925-1935

(12.48%)

1935-1945

45.68%

1945-1955

163.90%

1955-1965

141.91%

1965-1975

(15.75%)

1975-1985

136.49%

1985-1995

171.12%

1995-2005

153.93%

A related table I put together for another article using the Dow Jones Industrial Average shows similar returns:

10-Year 
Period

Dow Jones Industrial 
Average Return

1908-1918

60%

1918-1928

254%

1928-1938

(49%)

1938-1948

14%

1948-1958

226%

1958-1968

77%

1968-1978

(19%)

1978-1988

165%

1988-1998

331%

1998-2008

(9%)

What's it all mean?
These are big, broad tables, so the takeaway from them should be big and broad as well:

After booms come busts, and after busts come booms. That's how markets work.

When you take this view, it becomes obvious that the single most important variable in determining future returns is the starting price. That stocks posted negative returns over the past decade should surprise no one -- starting at the peak of the dot-com bubble in 2000 means we needed miracles just to break even. Ditto for the late 1920s and late '60s. It's like trying to run a marathon after not sleeping for three days. Or starting an eating contest right after Thanksgiving dinner. You'll fail. Hard.

Conversely, when you start a period wrapped in pessimism and despondency, the odds that you'll finish on an up note are quite good. That's just what happened from March of this year through today, as the S&P 500 surged over 65% even as hundreds of thousands of jobs were lost. When the starting point is formed by people who think the world is about to explode, the economy doesn't need to achieve anything remarkable for stocks to score incredibly remarkable returns.

That's why some of the biggest gains since March came from companies like Ford (NYSE: F  ) , Citigroup (NYSE: C  ) , and Sirius XM (Nasdaq: SIRI  ) . On the other hand, Yahoo! (Nasdaq: YHOO  ) saw revenue shoot up nearly eleven-fold over the past decade, yet shares fell 80% during that period. I'll say it again: The single most important factor in determining future returns is the price of your starting point.

Reasons to be optimistic
The good news is that there are currently plenty of high-quality companies trading at attractive valuations, upping the odds of strong returns over the coming decade. Check out Procter & Gamble (NYSE: PG  ) at 15 times 2010's earnings. Or Johnson & Johnson (NYSE: JNJ  ) 13 times next year's earnings. Others might like AT&T (NYSE: T  ) with a 6% dividend yield. It's still a fruitful time to be an investor, Fools.

No one has a clue what's going to happen over the next decade. But if the history of markets going back almost to the Civil War is any indication, the odds that the next decade will be more prosperous than the last are fairly good.

Here's to a happy new year, and an even happier new decade.

Fool contributor Morgan Housel owns shares of Johnson & Johnson and Procter & Gamble. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor selections. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Procter & Gamble and has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (32)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 24, 2009, at 11:15 AM, FleaBagger wrote:

    Merry Christmas! I agree with you that the price paid for a stock is crucial. What I take away from those charts is that stocks are still overpriced from the bubblicious 80's and 90's (>200% and >300% !!!!!!), and we still haven't allowed the stock market to adequately deflate (-21.39%). Gold and out-of-the-money puts on homebuilders seems like a pretty good strategy until stocks become fairly priced or the dollar falls enough that the high notional price of the stock market is justified by inflation.

  • Report this Comment On December 24, 2009, at 11:20 AM, daveandrae wrote:

    In January of 2000, Simon Property Group was selling for working capital, or just under 20 bucks a share, yielding 9% in dividends.

    Today, it trades over 80.

    At the same time, Phillip Morris was yielding 7-8% in dividend income, and has since exploded to the upside.

    Pepsico, a name everyone knows and can easily understand, was trading around 35, which was roughly 14 times 2000 earnings. It now trades over 60.

    By 2001, Apple was selling for working capital, or right around 11 bucks a share.

    In 2003, you could have bought McDonald's for roughly 1.5 times working capital, or right around 12-13 bucks.

    Today, GE sells for just 1.4 times book value. The last time this stock was this cheap was 1979, when it sold at a split adjusted price of a dollar against .78 cents in working capital. Twenty years later, in 1999, you were up 60 FOLD.

    Pfizer will easily earn 1.66 in net earnings in 2010, against a 18.55 stock price. Yet the stock just sits there, with NO takers

    The simple truth of the matter is that the stock market is nothing but a big grocery store of businesses. There is ALWAYS something on sale. It seems to me that the biggest losses always stem from not asking the basic question of "how much?" As history clearly shows, you cannot buy what is popular and do well.

    Thomas Edmonds

  • Report this Comment On December 24, 2009, at 7:52 PM, xetn wrote:

    Morgan:

    Do you know if the charts that Shiller has constructed are adjusted for inflation? The reason I ask is the value of the dollar has dropped by over 95% since 1913, when the Fed was created to "stabilize the dollar".

  • Report this Comment On December 24, 2009, at 8:01 PM, TMFHousel wrote:

    xetn,

    I can always count on your 10-times-daily "Fed ruined my life" rants. I just wanted to let you know that Ben Bernanke wishes you a Merry Christmas.

  • Report this Comment On December 28, 2009, at 11:28 AM, wtatm wrote:

    Hi Morgan,

    Thanks for the excellent analysis. Quick question... do you know if the returns above include or exclude dividends / dividend reinvestment?

    Thanks.

    Jim

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