Markets & Finance

Stocks: The "Loss" Decade


A disastrous ten years for the stock market ends in just a month. Will the turning of a new decade change investors' luck?

With the '00s about to flip the odometer to the '10s, there has been a raft of commentary about how lousy a decade this has been. Stock investors can vouch for that: The ten years since Y2K are on track to produce the worst total returns for investors since the 1930s. And, after the roaring '80s and '90s, the disappointment of the last decade is all the more galling. Indeed, it will be hard for investors to wash the taste of trillions of dollars of losses from their mouths. In both the 1980s and the 1990s, the broad S&P 500-stock index index provided a total return (which includes dividends) of more than 400%, according to Capital IQ, a Standard & Poor's business. The total return for the S&P 500 since New Years 2000 has been negative 10.8%. Even long-term, Stocks Are Risky

"The lesson is that stocks are risky," says Boston University Prof. Zvi Bodie. And, what's often forgotten, he says, is that stocks' risk is dangerous even to investors over a long-term horizon of ten or more years. Investors have received this lesson before. The 1970s were a brutal decade for stocks. The S&P 500 did produce a modest total return of 17.2% in that decade, but those gains were entirely wiped out by inflation. The U.S. dollar lost 53% of its buying power in the inflation of the 1970s, compared to just 20% since 2000. After the 1970s, average investors spent years looking for every excuse to stay away from equities, says market veteran John Merrill, chief investment officer at Tanglewood Wealth Management. But soon, as the market ticked higher year after year, investors forgot to be afraid. "It's hubris," says Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac. "We all got pretty proud." Investors piled into not just safe stocks but risky ones, such as the unprofitable tech stocks that collapsed in 2001 and 2002. "There was this massive swing from underappreciation of equities at the end of the '70s to overappreciation of equities at the end of the '90s," Merrill says. There were other bubbles, as real estate prices peaked in the middle of the decade and commodities peaked in 2008. What's Behind This Downturn

Trying to explain why exactly the stock market underperformed this decade may be almost as difficult as predicting how it will perform next decade. Merrill believes stocks' poor returns had more to do with their overvaluation at the beginning of the decade than to weakness in the underlying economy. Though, he notes, the economy was also being propped up by excessive borrowing. Hirsch believes a key factor for stocks in the 2000s was the September 11 terrorist attacks and the U.S. government's expensive involvement in wars in Afghanistan and Iraq. The Vietnam War hurt stock returns in the 1970s, he notes, while World War II kept the market down in the early 1940s. At the beginning of the decade, the market capitalization of the S&P 500 was $12.3 trillion, according to Standard & Poor's. Now, though the components of the index have changed, the market value of the broad index has fallen to $10.1 trillion. Are corporations really worth less in late 2009 than they were in 2000? Rob Lutts, founder of Cabot Money Management, notes that many companies are doing much better than a decade ago. "They've created a lot of value in the last ten years that isn't reflected in their share prices," Lutts says. Nowhere to go but up?

Hope springs eternal on Wall Street. And some investors are betting that weakness in the 2000s actually could produce outsized returns next decade. That's been the historical pattern, Merrill says. "Nine out of ten times, a bad decade is followed by a very good decade," he says. Right now, most investors are staying away from risky investments. "I say, 'Be a risk taker,'" Lutts says. "No one else wants it. It's a contrary viewpoint." Stocks do have the potential to do well, Bodie says. But that's impossible to predict with any certainty in advance. And, "for many people that does not overcome [stocks'] risk." In 1969, investors weren't likely to predict the oil shocks of the 1970s. Just as prognosticators in 1999 had no way to predict the wars and market shocks to come. Investors in 2009 are looking out into an unknown future. Those willing to make big bets could profit. Or they could face yet another decade of dashed hopes and shrinking 401(k)s.

Steverman is a reporter for BusinessWeek's Investing channel.

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