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10 years of nonexistent stock returns

Posted by: Michael Mandel on September 24

I’ve been thinking about whether to put more money into the stock market, or take my remaining money out. I’m still undecided, but here’s the thing. When I looked back over the last 10 years, I discovered that the inflation adjusted return on the S&P 500 was -17%. Including dividends, the inflation-adjusted return was only -2%.

That’s astounding, especially given the supposedly high profits and the low interest rates.

If the stock market accurately reflects the state of the U.S. economy, that means the past ten years have been an era of stagnation for the U.S. That’s a perspective I’ve been moving towards, unfortunately, over the past couple of years.

That suggests the excess buildup of debt was the result of economic weakness, rather than the cause of weakness. It also goes in parallel with the almost nonexistent real wage growth over the same period.

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Reader Comments


September 24, 2008 12:36 PM

"If the stock market accurately reflects the state of the U.S. economy, ..."

How could it be otherwise, over several years???

Even the now legendary Y2K/dotcom stock bubble was a mirror image of actually increased economic activity. The primary driver was "tech", but there was a large amount of "multiplier" business that went bust together with the primary driver. It was not just hot air on the bourses.


September 24, 2008 12:41 PM

I also appreciate the consideration of dividends.


September 24, 2008 01:19 PM

It is no different than the 1970s. stocks boomed until 1965, and then had ups and downs until 1982, where it was still no higher than in 1965. 17 years of flatness (1965-82) were followed by about 16 years of gains (1982-98).

If a similiar pattern is underway, we are 10 years into the present period of flatness, which will still run 6-8 years.

Of course GDP did grow a lot over 1970s, despite two recessions and high unemployment/inflation.

Of course, there are still many opportunities to make money, in certain sectors, in covered calls, and in fundamental analysis.

Joe Cushing

September 24, 2008 01:20 PM

That's a big "IF" and the answer is, it doesn't in the short run.

I don't see this as much of a surprise. In 1998 we had 1928 style exuberance in the stock market. The market's, market cap was way out of whack with its intrinsic value. The stock market was not really worth what you could sell it for in 1998. If you look at the intrinsic value of all the companies in the stock market over the last 10 years, I'm sure you would find a nice return. Over time, the stock market will follow that intrinsic value. I just hope you got out of the market in the late 90s. You are comparing one of the largest peaks of all times with a mild drop. If you want a more accurate measure of returns, you should compare the market to the bottom of 2001 or 1991, not the top of 1998.

What you are doing is like measuring a lake level at the top of a wave, the next year measuring it at the bottom of a wave and saying that the lake dropped. You have to measure at the same part of the wave. Even then, there could be distortion because the waves can change size. The bottom of a wave one year could be higher than the botton aother year without any change in lake level. What would be better would be to find a way to measure where the lake would be if it had no waves at all. Maybe an average of peak to valley would work. Think of the ocean if that makes more sense to you. Where I'm from the lakes have real waves that can sink ships.

Recent history has really distorted the minds of investors. The more people who think like you, the better it will be for optimists. They will have more time to accumulate funds to invest at cheaper prices. Eventually this attitude will pass and we will have another over-exuberant peak to compare to 1998. Today, equities are in relatively calm waters compared to the 1990s.

This is why financial crises has barely brought us a bear market. Stocks weren't that overvalued this time around.

Keith G

September 24, 2008 03:42 PM


I think it would be better to compare business cycle lows to business cycle lows and business cycle highs to business cycle highs. In 1998 the S&P was running up to its all-time high. So, if we compare Sept 02 (a business cycle low) to today (hopefully also a business cycle low) I get a real increase in the S&P of 1.37% and also a real increase in per capita Real DPI of 2.36% over the same period.

I realize that the BLS reports flat real wages but the BEA reports real disposible personal income increasing. When I divide real DPI by workforce and then calculate an annual increase I get a real increase of 1.47%

I realize these are not stellar numbers but I think they are more comparable.


September 24, 2008 03:46 PM

I agree with Joe. If you are referring to the market during 2000 (Spring and Summer), the valuation already reflected the expected economic growth of the subsequent 10 years. After the bubble popped, however, the stock market valuation (relative to true economic activity) has come down closer to historic norms (though still a bit on the high side).

Technically speaking, economic growth of the last few years was real. However, as you reported extensively, this period has been associated with a huge increase in consumer debt, and the economic growth was driving by borrowing. So in that sense, maybe that growth was not "real".

I agree that the next few years will see little or no growth, due to this massive deleveraging. However, since stock market valuations never quite came all the way down to historic average (relative to the real economy), I wondered whether the market (even at the low level now) has factored into the reality that we will face an extended period of consumer retrenchment and stagnation.


September 24, 2008 03:48 PM

I understand the previous comments point - anyone can pick the start and end points of a period to create either a positive or negative slope to the line in terms of investment returns. But the proposed solution - pick 1991 or 2001 as the starting point - has the same problem and is just moving the goal post to maximize the apparent return. And it is just as inaccurate a measure for determining return.

Mike Mandel

September 24, 2008 04:25 PM

I initially picked ten years for its round number value. But it also is true that 1998 is when consumption growth started to diverge from gdp growth. 1998 is also the year when the trade deficit started soaring upward.

Looking back, I think 1998 was a signficant turning point that we didn't realize at the time.


September 24, 2008 04:47 PM

One the best viewpoints on the financial crisis has been that the bailout isn't about preventing wall street from spilling over to main street, but that main street has been rotten for a long time and finance has papered over its problems until it no longer could. Finance won't be solved without solving main street.

Joe Cushing

September 24, 2008 11:02 PM

Lord, you make a good point. I wouldn't call it a best point though. Wall Street should have known what it was getting into. I'm not sure what the best course of action should have been for them given their situation described by my Banking professor. The situation wasn't caused by main street alone.

He wrote

"...These new financial derivatives were created in response to the aggressive lowering of interest rate in the late 90’s in response to a slowing of the U.S. Economy. Those lower interest rates created liquidity in the marketplace that was more than was needed to fund growth. As liquidity increased, banks continued to lower loan prices to compete with other Commercial Banks for fewer and fewer deals in the marketplace. It was said by more than one banker, that loan deals were not being priced appropriate to it’s risk, because of the excess of liquidity and therefore in the increase in competition to acquire those deals. ..."

How do you make a profit in that environment that is appropriate for the risk level?


September 24, 2008 11:41 PM

I suspect recent downfalls on Wall Street are signal to a collapse in Empire America Incorporated. Hopefully, the American Congress will disallow an encore by heavily regulating the Federal Reserve’s pitch for a $700 billion bailout towards American banks.

More of my thoughts follow at:

Brandon W

September 25, 2008 10:00 AM

If I spend a few years buying new HDTV's, cars, furniture, designer clothes and watches, you may look at me and think I've really increased my wealth. "Wow, he's really doing well!"

But if all that was purchased with credit cards and loans, was it real income growth or was it all an illusion? We know the answer to that.

The reality is that all I'd own would be a bunch of rapidly depreciating goods (can we really even call them assets?), and have huge debts hanging over my head that I have to try to repay... with lots of interest.

This is the country we've created in less than a decade.


September 25, 2008 10:26 AM

Anyone talking about bonds, and muni bonds here? Seems like money will be tight for the regular guy and corporations with anything but sterling credit. Rates across the board will rise, because Uncle Sam is borrowing $1T dollars, in return for garbage. They'll also have to maintain all those empty homes. Maybe I'll be cutting lawns for the government? Rates are headed up, folks. Lets hear some talk about bonds. As well, we're gonna see taxes rise - making Muni's look pretty good. This is about BORROWING money, and I've got it. I'll lend it, BUT at a high rate of return, to those with great balance sheets and stellar credit. Time to stop burning money on stocks.


September 25, 2008 02:20 PM

The two major bottoms in the stock market were 1932 and 1982. So it essentially happens once within a person's adult lifetime.

Today, to be at a similar valuation, the Dow would have to fall to about 8000. I don't see that happening.


September 25, 2008 06:19 PM

Kartik, I'll see you at DOW 8000. 'Cause I can see that happening within three months.


September 25, 2008 06:54 PM


I highly doubt it. I have consistently said that the S&P500 at 1160 is a great entry point, and I see no reason to modify that position.

S&P500 at 1160 corresponds to a Dow at about 10400. So I am willing to bet on that being the bottom. I have gone long to the hilt at 1160 last week.

If the Dow did go to 8000, that would be a once-in-a-lifetime buying opportunity (just like 1932 and 1982 were). I don't think we'll be that lucky.


September 26, 2008 04:28 AM

JP Morgan buys WaMU!!??
Holy cow (to borrow one from you guys), it's like Bad Bart, having held up the stagecoach and stolen the town bank's gold, then gets to buy the distressed town bank with the proceeds.

Mike Reardon

September 26, 2008 03:19 PM

I see this as the ying and yang of globalization, the foreign yang Asia’s gain of exponential economic growth in manufacturing and production while the US held its trading position the ying in opposition to it. Also corporations that started within the S&P 500 took themselves totally into the foreign markets that they feed into existence. There rewards went offshore with there status. As I recall much of the last 2 quarters corporate profits have been directly from returns generated in foreign markets.
The lack of domestic expansion and returns can be blamed on supply side rewards being reinvested into all other now failing options.

In world term there was a greater generation of real wealth but in the US greater rewards drew off direct investments back into expanding US services.

Ron C.

October 6, 2008 01:59 PM

You ain't seen nothin' yet!! The Baby Boomers are fast approaching retirement age at which time they'll be cashing in their vast stock market holdings. This is called a massive sell off. Hm-m-m-m-m, need I say more???

bob m

October 12, 2008 09:56 AM

now we've got the perfect storm and the people that caused it can't stop it.. lets all thank the father and son team george w. and jr.


October 13, 2008 06:37 AM

Japan can beat the Nikkei 225 Index is lower than it was in January 1984, the farthest yahoo and google go back. That means negative return for 24 and 3/4 years.

Ron R

October 13, 2008 07:34 AM

In the crash of 1929 even the wealthy took huge losses. This time it's different. Virtually all the fat cat CEO's, corporate big-wigs and assorted Wall Street con artists have walked away with hundreds of millions of dollars in ill got gains while virtually all pension plan investments have taken huge losses. Now you know where all your pension money went. Sad thing is, we're going to do it again!! As soon as the stock market shows a couple of plus days we'll fall all over ourselves to take what's left of our pension assets and blindly plow them into the stock market once again and the story repeats itself ad infinitum. When will we learn? Oh, when will we learn?

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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