StockWatch

Lost and Found

By Mark Hulbert,
Editor of the Hulbert Financial Digest, a service of MarketWatch.com

The "lost" decade?

Maybe so.

But, if so, this is not the first time over the last two centuries that a decade has been lost. And, on each of the prior occasions, the stock market "found" itself soon thereafter.

I am not the first commentator to discuss the depressing fact that, over the decade ending this past December, the S&P 500 index produced a loss. Even with dividends added back in, the index lost 15 percent, or 1.6 percent on an annualized basis.

But, few of those commentators have noted that, depressing as the picture is that is painted by these statistics, the true picture is even worse. That's because, over the last decade, the consumer price index rose by more than 28 percent -- equal to approximately 2.5 percent annualized.

This means that an investor who put a lump in a stock index fund at the beginning of 2000 and held it until the end of last year lost ground at the rate of approximately 4 percent per year. What a shock to investors who blithely assumed that 10 years were more than long enough to provide assurance that the stock market would outperform inflation.

But, investors at the beginning of the decade should have known better. If they had carefully studied the historical record, they would have discovered a number of past 10-year periods during which the stock market produced a negative real return.

The most recent such period was the summer of 1982. According to an analysis I ran on data compiled by Yale Professor, Robert Shiller, the stock market's trailing real return that summer was minus 3.6 percent annualized. The other "lost" decades that suffered the largest inflation-adjusted losses include the one ending December 1974 (when the trailing ten-year real return was -2.7 percent), August 1939 (when the trailing return was -3.3 percent) and June 1921 (when it was -3.1 percent).

While there is some solace in knowing that the decade we've just suffered through is not unprecedented, the good news is that, in each past case since 1870 in which the market's trailing ten-year return was negative, its inflation-adjusted return over the subsequent 10 years was positive.

This has held true even during decades of high inflation, such as the 1970s. Consider an investor who put a lump sum into the stock market in late 1974. He or she would have been well behind inflation during the latter part of that decade, of course, when the consumer price index was rising at double-digit annual rates. But, for the full decade through the end of 1984, this investor would have had an inflation-adjusted total return of 5 percent annualized.

To be sure, there is no guarantee that the future will be like the past. It's possible that the stock market could produce two negative real-return decades in a row.

But, one can't base an argument that it will do so on this country's stock market history.