Magazine

A Decade of Decay


The current stock market slump caps a string of letdowns in the years since 1999

Don't look now, but we're putting the final touches on the market's Lost Decade, the worst showing for U.S. stocks since the Great Depression. That's right. Call off the dogs. Send in the clowns. Color me presumptuous, arrogant, and ignorant of history. But the facts have my back.

We kicked off the millennium with an all-time high for the Standard & Poor's 500-stock index, capping a remarkable 18-year stretch. A $10,000 investment in 1982 ballooned to a quarter-million by 2000. Bartenders and manicurists played the pink sheets. In Cisco (CSCO) we trusted. Even Tony Soprano's wife watched CNBC.

Then came dot-bomb, September 11, Enron, WorldCom, and Adelphia. Shareholders discovered CEOs had fleeced them for $6,000 shower curtains and anatomically functional ice sculptures. The Nasdaq, the index of our New Economy hopes and dreams, crashed. Heartbroken and betrayed, we fled to seemingly stable real estate.

Despite Iraq and a quadrupling of oil prices, the S&P eventually revisited its peak in 2007. Emboldened, the pros urged us to buy Citigroup (C), arguing it couldn't possibly get any cheaper. They swore that retiring baby boomers would covet the dividends of large-caps. They said real estate would neatly hand the baton back to stocks.

What they forgot to mention was that subprime would whack the market right back down. The index's average annual gains of 1.7% for the decade are the worst since the 1930s. Sure, we've got two more years to go. But 2008 has already opened with the biggest one-day drop in 25 years. And just a week into January the market gave back all its gains from 2007.

In all, the S&P 500 would have to surge a total of 54% by 2010 for the decade merely to match the lowly 1970s. Back then, when stagflation, gas lines, and Barry Gibb's mane dominated the zeitgeist, the market returned an average 5.8% a year. The current decade's gains lag even those of the 1940s—marred by Nazi marauding, Pearl Harbor, and Hiroshima.

Granted, there have been bright spots. U.S. small caps picked up much of the slack from their bigger brethren. And emerging markets have never had it so good.

But mom and pop aren't having any of it. Investor sentiment is actually lower than it was at the market's panicky bottom in 2002. Indexes made new records just months ago, doubling from their trough. Great! But some $54 billion still fled U.S. stock funds last year. And retail money market funds collected more money than any other asset category; overall, trillions of dollars now sit parked in cash. Citigroup's dividend may be in jeopardy these days, but the National Bank of Tempur-Pedic has a cushy balance sheet, thank you.

With the "R" word front and center, lots of "rational" investors are quaking in fear—blindly stockpiling gold and willingly accepting Treasuries at yields so low that they're actually negative after inflation and taxes. By way of comparison, U.S. equities sport an average earnings yield (profits divided by price) nearly double that of government bonds. Financial consultancy Trend Macrolytics notes that this disparity between Treasuries and U.S. stocks is the widest it has been since 1983, a signal that shares could be significantly undervalued.

And stay tuned: The Federal Reserve is likely to cut interest rates even more, depressing bond yields further and making it increasingly masochistic to stick with cash. "The falling yields are a big safety net for stocks," says market strategist Jason Trennert of research firm Strategas Research Partners. "It makes them far cheaper than bonds."

The smart money isn't holed up like the rest of us. The rarefied likes of Warren Buffett and Citadel's Ken Griffin are plowing capital into equities, particularly financials, ground zero for the subprime meltdown. Sovereign wealth funds are on the prowl. And foreign companies are wheeling and dealing. They accounted for nearly half of U.S. mergers and acquisitions in the last quarter of 2007. If we don't eat our home cooking, others will.

But it's your party, and you can cry if you want to. Stuff that mattress. Burn those unopened brokerage statements. Exile your 401(k) login to the Siberia of your subconscious. Go ahead and write off the market for the next 24 months. This decade is a lost cause.

For all our sakes, I hope I'm wrong.

This is Senior Writer Roben Farzad's inaugural column.

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