On September 7, 2000, the Dow closed at 11,259. This morning, exactly 10 years later, it's holding tight at around 10,450.
There's the "lost decade" for you. Add in dividends and it's not quite as bad. But there's no question about it: The past 10 years have been absolutely horrendous for stocks.
Patience has been pushed to the limits. That's given. I can't count how many news articles I've seen profiling frustrated investors who are ready to throw in the towel. They assume market returns from most of the post World War II through the late '90s were a fluke, unlikely to ever be repeated again. As volatility jumped over the past few months, there's been an almost Pavlovian-like uptick in this sort of response. "[The] market hasn't gone ANYWHERE in 10 years" a caps-happy reader recently emailed me. "Only a FOOL can look at that and STILL BE LONG STOCKS RIGHT NOW."
I don't buy it. If we're going to dwell relentlessly on this lost decade, let's get an important point out of the way: 2000 was the peak of the most wacked-out stock bubble the world had ever seen. As long as 2000 is used as a base year, any and every historical comparison will look atrocious.
In 2000, the S&P 500 traded at an insane 28 times trailing earnings. That was a recipe for sheer misery, which is exactly what followed. And most people knew it. As early as 1996, analysts were getting nervous -- that's when Alan Greenspan gave his "irrational exuberance" speech. By 2000, you had to be delusional not to see it.
As I remember it, just about everyone knew stocks were a bubble bound to burst, but they didn't want to leave any money on the table. So they stayed in, confident of their ability to get out before the carnage hit. This attitude -- that markets were blatantly overvalued but should still be bought with abandon -- created a complete disconnect between stocks and the value of their underlying businesses. And that disconnect robbed future returns. By soaring an average of 25% per year between 1995 and 1999 when business performance justified nothing of the sort, the Dow was guaranteeing that future earnings improvements would not be rewarded with higher stock prices.
And that's exactly what happened. Consider that as stocks lost ground over the past decade, S&P 500 earnings have actually grown 51%. Dividends? 42% growth. These growth rates aren't spectacular, but they uncover an important point: Lousy returns over the past decade had little to do with what happened during those 10 years, and a lot to do with where we started 10 years ago. By starting with painfully high valuations, stocks were ensuring poor returns from Day 1.
Paid for performance?
To show how powerful this phenomenon was, take two companies: Microsoft
Since 2000, Microsoft has roughly tripled revenue, and more than doubled net income per share. What did shareholders get for this performance? A stock that's fallen more than 50% from its 2000 high.
Altria, on the other hand, has barely grown revenue, and actually saw operating profit climb only 10% or so over the past decade (adjusted for all spin-offs). What did shareholders get from this performance? A stock that's surged 240%, plus an annual dividend that typically hovers around 6%-8% per year.
The only difference between these two outcomes is that, 10 years ago, Microsoft had implausible expectations and traded at an outrageous valuation, whereas most people forgot Altria even existed. More than earnings, more than GDP, and more than interest rates, the single most important factor that determines future returns is starting valuation. That's the only reason we've had a lost decade.
So where are we today? Pretty close to the polar opposite of 2000.
The S&P trades around 14 times trailing earnings. Dividend yields are higher than Treasury yields for the first time in half a century. Hedge fund managers are giving up. Piles of high-quality stocks, from Pfizer
Ten years ago was the time to be worrying about a lost decade. Not today.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.