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11/05/2009
The Decade Behind;
The Decade Ahead
By
Edward L. Snitzer
As the year 2009 and the decade 2000-2009 wind down, it is a very different time from the beginning of the decade. The ten and twenty years ending 1999 realized annual stock market returns of 18.2% and 17.9%, respectively, as compared to the 20th century average annual stock market return of 10%. Indeed, the twenty years ending 1999 was the best twenty year decade period in the 20th century. There were few who saw what was coming next.
What came next was one of the worst ten year periods in 110 years. Through the end of October, 2009, the stock market for the period January 2000-October 2009 is down -1.5% annually. Buying the S&P 500 in 2000 for a $100.00 has resulted in an ending value of $86.00 in October of 2009. Assuming the market hovers around Dow 10,000 by year end, the decade 2000 will be the worst ten year decade, which includes the 1930s, in the last 110 years. In addition, it will be the first decade, excluding the 1930s, that saw not one, but two declines, of more than 35%. (2000-2002 -45%, 2008, -37%).
We advised our clients by e-mails during the terrible period September 2008 through March, 2009, that the Great Depression was not going to be repeated; that the Federal Government was not going to allow the banking system to fail; that the financial crises and recession would eventually pass; that timing the end of a bear market was not possible; and that historical experience suggested that recoveries after a bear market can be, on average, as much as 35% or more and can happen very, very, quickly.
That advice was good advice and our clients benefited from it.
There is a vigorous debate concerning what is coming next. By “next” is usually meant the mid-term elections in 2010 and the next Presidential election in 2012. Will it be a sharp “V” rebound for the economy and the stock market or will it be a shallow “U” recovery?
Today, as was the case in the 1930s, what the government does and doesn’t do, will significantly determine the future. While the banking system has been spared, the looming next decade of enormous projected governmental deficits of unprecedented levels, together with the massive governmental intervention into the private economy, presents issues that have never been presented on this scale to the American body politic. How will the American people respond to these new challenges? Anyone who professes to know what the world will look like in 2019 will have no more success than those predicting in 1999.
Stock market projections are hazardous and we make no predictions or forecasts about future stock market returns. Where could the stock market be in 2019? If, and it is only an if, the twenty year period 2000-2019 were to obtain the average 10% return of the 20th century, the decade 2010-2019 would need to realize annual stock market returns of 21% over the next ten years, an heroic result! If, a decade return of 8%, at best, is coming, the twenty year experience 2000-2019 will have an annual return of just 3.2%, which occurred just once in the 20th century, 1929-1948. These numbers and observations make the point that investors that lose a great deal of money by taking a great deal of risk, will need a long, long time before, the “long term” bails them out.
We are facing unprecedented challenges, unknowns and risk. The level of financial and economic risk has not diminished. How our current problems will work themselves out is absolutely unknown. In his recently published diary of his 1930s Great Depression experience, The Great Depression, a Diary,” Benjamin Roth, a lawyer, notes that none of the experts of his day saw what was coming or knew how it would end. Relying on experts predicting the future was hopeless, he wrote, since they could not predict the future. He concludes that the only proper course was to “use your own judgment and do your own thinking.”
PMA lives by these words.
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