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| The decade in review | Monthly Economic Update | |||||||||||
| A turbulent ten years The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify. Stocks Was it really a "lost decade"? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an investment tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.1,2 Well, that sounds dismal - but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade. The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s - health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).2 Few articles about the "lost decade" mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s.2 Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare all that with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade.3 Highs and lows We are 10 years past the bursting of the tech bubble - March 10 will mark the 10th anniversary of the NASDAQ’s all-time high of 5,132.50.4 And of course, a decade-defining geopolitical event rocked the markets 18 months later. General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron - the company that Fortune Magazine ranked as “most innovative” each year from 1995-2000.6 In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out. The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.6 From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%.2 This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best. What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned lessons in perseverance - some who stayed invested have seen their portfolios make a strong recovery. The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history – for example, the Dow hadn’t had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s.7 Will we see it make a double- or triple-digit advance in the next ten years? We don’t know. Past performance is no indicator of future success. Yet the potential of the stock market should not be dismissed, it is clearly time to look forward and stay invested. The Dow Jones Industrial Average is an index of 30 widely held securities. The S&P 500 Index is an unmanaged index generally representative of the U.S. stock market. An index measuring the performance of the 2,000 smallest companies. The Russell 2000 serves as a benchmark for small cap stocks in the United States. An investor cannot invest directly in an index. Past performance is not a guarantee of future results. International investing presents certain risks not associated with investing solely in the United States. These include currency fluctuations, political risks, accounting procedure differences and the lesser degree of public information required to be provided by non-U.S. companies. Sector and small cap investing come with certain risks not associated with diversified or large cap investing. Citations. 1 money.cnn.com/quote/historical/historical.html?pg=hi&close_date=12%2F31%2F99&mode=add&symb=DJIA [1/16/09] 2 cnbc.com/id/34645043 [12/31/09] 3 cnbc.com/id/34643111 [12/31/09] 4 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=2 [12/31/09] 5 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=4 [12/31/09] 6 the-privateer.com/chart/dow-long.html [12/31/09] 7 cnbc.com/id/34619797 [12/29/09] |
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