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12/04/2007
"Measuring Time"
By
Fred D. Snitzer
Obsessive cataloguers of time, we human beings love to reduce each decade to a simple label: the roaring 20’s, the Depression 30’s, the Reagan 80’s, etc. These simplifying generalizations, flimsy anchors that help us impose order on a chaotic and random world, provide us with a narrative to our lives.
Now that we are approaching the end of the first decade of the new millennium, the inevitable urge to categorize this past decade will commence. And how will this past decade be seen?
At this point, probably not all that well. Despite the optimism that typically greets a turn of the century, this first decade of 2000, at least for the financial markets, has turned out to be a low dishonest decade: Enron, mutual fund scandals, ninja loans, financial products disguised as harmless sounding acronyms, Bernie Madoff, and a negative return of 1.5% per year on the S&P 500. The not-so-immutable laws of finance were turned upside down, as boring bonds offered more return and less risk, and sexy stocks turned out to be quite ugly, offering more risk and less return.
Now that it’s coming to a close, what will the next decade bring? If you think the stock market swings back and forth from decade to decade, like the pendulum at the Franklin Institute, with good returns following bad ones, then you are already anticipating a nice healthy return, a reward for the pain you’ve endured over the past 10 years.
How easy life would be if the decades flipped like night and day; we could hunker down for the bad 10 years and then live it up for the next. The truth is that each decade bleeds into the other. It’s not as if when we wake up on January 1, 2010, the world will change, our problems will disappear, and we’ll all go about following some sort of predetermined script called “The 2010’s – The New Era of Financial Sanity, Outstanding Integrity, and Fiscal Responsibility”.
Simply put, the market could not care less that we’ve just suffered a bad decade. It doesn’t know what a decade is. The market doesn’t really care that a number changed on the calendar. Why should it? What does it have to do with the level of interest rates, the price of the overall market, the forecasts of future earnings, the drag on the housing market, the toxic assets still on the balance sheets of banks, or the level of tension in the Middle East? It has zero to do with any of these things.
The truth is that our two-hundred-plus year sample of American stock market history can be more sensibly divided by periods of time that often are more or less than a simple 10-year period.
So, for example, we saw completely flat returns during the twenty-year period of 1929 through 1948, followed by a sixteen-year period from 1949 through 1965 of 13% returns per year. After that came another sixteen-year period of flat returns (due to the inflation of the 1970’s), followed by a seventeen-year bull market of 15% annual returns from 1982 through 1999. As to whether this ten-year period of flat returns in the broad equity market is coming to a close or will extend for a few more years, only time will tell. As always, past is not prologue, and projecting returns into the future based on patterns of the past is a risky and unscientific endeavor.
It’s possible that we will see a healthy rebound to the last ten years, but prerequisites for such an outcome would include a resolution of our absurdly large entitlement problem, a steep increase in productivity, a serene geo-political environment, and a healthy political process in which our politicians demonstrated wisdom, integrity, candor, foresight, courage, and a willingness to put the economic health of the country before their political careers. It’s not likely that all of those variables will fall into place, but it’s not impossible. At least some of them will occur, though our money is not on the politicians.
For the rest of us, all of this number crunching is not really that interesting, and we don’t really want to spend even a fraction of our time thinking about the different ways in which you can statistically dissect a two-hundred year period of American stock market history, unless you also enjoy reading actuary tables and the proposed health care bill. We just want to know: is our money safe? Will it grow? Or, will it at least not get smaller?
There are no easy answers to these questions. We can’t insulate ourselves from risk. We can’t expect 10% compounded returns year after year after year. Nor should we anticipate 0% returns year after year. We can’t predict the future and we can’t rule another incident of a black-swan-tail-risk-six-sigma event. However, we can diversify our assets, avoid fads and risky securities disguised as harmless acronyms, re-balance a few times per year, live within our means, and be thankful for what we have. Even during these uncertain times, we have plenty to be thankful for.
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