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During the darkest 10 years of the Great Depression, from September 1929 to September 1939, the stock market dropped roughly 50%, adjusted for inflation. With today's drop in the stock market, the U.S. has now matched that unfortunate milestone. The Standard & Poor's 500-stock index, adjusted for inflation, is now down about 50% over the past 10 years from Feb. 17, 1999 to Feb. 17, 2009.
Other assets have done much better over the same period. For example, a nice safe investment in six-month certificates of deposit would have yielded a real total return of roughly 12% over the past 10 years. And despite the recent real estate bust, residential home values in the largest cities, adjusted for inflation, actually increased by about 30% over the past decade.
The Depression-level decline in the market has come during a stretch when many small investors, on the advice of financial advisers and the financial media, put much of their savings into equities. The enormously influential book Stocks for the Long Run by Jeremy J. Siegel, which was published in 1994, convinced people that they should ignore the short-term ups and downs of the market.
But the mantra of "stocks for the long run" has reached its moment of truth. It's no longer possible to pretend that equities are a safe asset. Investors, looking at their depleted 401(k) and brokerage accounts, are being forced to ask the question: Do they have the stomach to stay in stocks, or are they ready to bail out?
Both approaches have their pluses and minuses. If you stay in stocks, you are accepting the possibility that the economy will plunge into a deep depression, and that your investments may never reach their original value again, much less show a profit. If you go into a safer asset, such as certificates of deposit, you are giving up any potential of an upside, especially if it turns out that the market has a big rebound.
Ultimately, you are placing a bet on the future of the U.S. and the global economy. Are we entering into a period of long-term stagnation or are there better days ahead? Two hundred years of history says that we are going to see more growth, but as the saying goes, past returns are no guarantee of future performance.
Mandel is chief economist for BusinessWeek.