The Lost Decade

London, UK - 1st January 2010, 00:55 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

Happy New Year to you and family! All the best for 2010! As 2009 ended, Wall Street capped its first-ever negative decade on a total return basis, even with dividends reinvested. US stocks finished the last session of 2009 sharply lower, though they held on to a strong advance for the year.

The decade 2000-09 was a lost one for all the major US equity benchmarks:

1. The Dow fell more than 9% over ten years, its second worst decade on record after the 1930s. The last time the Dow failed to make any net progress in a decade was in the 1930s, when it sank nearly 40% during the Great Depression;

2. The S&P 500 slumped by more than 24%, its first loss for a decade, producing an annualised, inflation-adjusted "return" of -3.3% over the last decade. In contrast to the Dow, S&P managed to advance even during the Depression years of the 1930s because of dividend payments;

3. The Nasdaq's performance was the worst for the decade as it slumped more than 44% over the past 10 years.

As good as 2009 was for US equity investors, it did little to make up for a decade of buy-and-hold misery. By some measures, the last 10 years have the dubious distinction of being the worst decade for equities since the 1820s, when reliable stock-market records began. The 2000s turned out to be even more horrific than the Stagflation Era of the 1970s or the Great Depression of the 1930s.

This unprecedented Lost Decade in Equities is due to a couple of mighty asset bubbles:

1. Dotcom and tech stock bubbles;

2. Runaway credit pyramid schemes; and

3. Complex securitisation instruments and derivatives.

Clearly, there has been a paradigm shift in the last ten years. Could it herald a pause in long term equity investing? Many ordinary people as well as professional investors are wondering, "How could this happen to me?" Many, amongst that common group, rode the stock market boom of the 1980s and 1990s. They came to trust the oft-repeated investment mantra of "buy and hold". However, going for a decade with no capital gain to show for it is hard to swallow for most ordinary investors. In the wake of the recent lost decade, some investors even say that they have come to regard buy-and-hold advice as fundamentally flawed! For many investors, the really deep punch of the financial-system meltdown of 2008 and the severe damage it did to their stock portfolio, when the Dow lost 54% from its all-time high in 2007 to its low in March 2009, has far exceeded the shock of the dot-com era losses between 2000 and 2003.

As a result, many investors have forsaken stocks for fixed-income instruments this year. They have poured cash into government, corporate and municipal bonds: securities that pay fixed rates of interest. Although it is possible to lose money in fixed-income bonds, the risks are perceived to be much lower. However, bonds lack the growth potential of stocks. Market experts see the sudden rush for the relative safety of bonds as a "contrarian" signal. They note that the most wildly popular investment strategy of the moment may often turn out to be completely wrongheaded. For example, US Treasury prices fell on the final day of 2009, leaving investors with a loss for the year. They delivered the second-worst annual return since at least 1973. In 2008, by comparison, the government bond market saw hefty returns of 14%.

On the positive side, the rally from the stock market's 12-year low in March 2009 to the end of the year represents the strongest rebound since 1933. The Dow has risen 61% over that time span! What next in 2010 and the coming decade?

[ENDS]

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