Why the Lost Decade is Good News for the Future
By
Michael Cintolo, Editor of
Cabot Market Letter and
Cabot Top Ten ReportFrom Cabot Market Letter 12/16/09
As the decade of the 2000s draws to a close in a couple of weeks, be prepared to be bombarded with stock market articles talking about the “lost decade.” Specifically, from its close at the end of 1999 at around 11,500, the Dow Industrials are on pace to lose a total of 9% during the decade. Broader measures like the S&P 500 (down 24%) and the Nasdaq (down 45%) have fared far worse.
On the surface, this seems like a depressing number. But is it? The vast majority of media outlets that report on the story will likely focus on the past (losing 9%), while intelligent investors will focus on the future (what happens after a decade of very poor returns). So we examined what happens when the Dow has lost money over a prior 10-year period. Here’s what we found:
Using month-end data going back into the late 1920s, there were 101 times when the Dow was negative over a 10-year stretch. Those times were clustered in two general time frames–the late 1930s and early 1940s, as well as the mid-1970s to the very early 1980s. And as it turned out, they generally represented good long-term periods to buy stocks.
Specifically, anytime the Dow was negative over the previous 120 months, the Dow delivered a positive return over the next five years a whopping 90% of the time. During those five years, it averaged a respectable 45% return (about 7.7% annually).
The numbers get better the farther forward you look. Anytime the Dow was negative over the previous 120 months, it rose in the ensuing 10 years every single time—101 out of 101 occurrences. The return during those 10 years averaged 124%, or about 8.4% annually.
Now, to be fair, when looking out over a shorter-term time horizon (say, during the following year), the results are far more volatile; they were generally positive, but you had lots of very bad results as well as many very, very good results. And that’s not surprising—it’s hard to glean a shorter-term edge from longer-term data.
But the main point here is that a so-called “lost decade” for investors has usually ushered in a powerful new bull period of many years. Of course, we’ll let our indicators guide us in the intermediate-term, but don’t be deceived into thinking that, because the 2000s were poor, the future will be equally bleak. History proves just the opposite …something to keep in mind as we welcome in 2010.
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