A disastrous decade for the stock markets just ended just a month ago. Will the new decade bring good luck for investors?
So many comments to express the disastrous state of the financial markets over the past ten years. Stock market investors can tell: the past decade has been the most calamitous in terms of stock market losses since the 1930s. After the booms of the 80s and 90s, the disappointment of the past decade has been humbling and frustrating.
Indeed it will be very difficult for investors to forget the smell of the billions of dollars of losses they have suffered.
In the 1980s and 1990s, member companies of the S&P500 index generated more than 400% in profits for their shareholders if dividends are included, according to Capital IQ. Conversely, since 2000 the same index has lost 10.8%.
Even long-term investments become risky
“The bottom line is that the stock market is risky,” says Boston University professor Zvi Bodie. And according to him, what is often forgotten is that stock market risk is dangerous even for investors beyond 10 years or more.
Investors learned this lesson years ago. The 1970s were a brutal time for financial markets. The S&P500 index performed by only 17.2% during this decade. Unfortunately for investors, the 17.2% gain was quickly swallowed up by record inflation. The US dollar lost 53% of its power during the inflation of the 70s while it has only lost 20% since 2000. After this period most investors spent several years avoiding the markets by invoking reasons as far-fetched as each other according to John Merryl, the chief investment officer of Tanglewood Asset Management.
But later when the markets began to climb year after year, investors forgot to be scared. “We were all very proud,” said Jeffrey Hirsch, editor of the Stock Trader’s Almanac.
Investors not only rushed into low-risk products but also bought risky products such as unprofitable technology stocks which precipitated the markets into crisis in 2001 and 2002. “We have gone from massive undervaluation from stocks in the 1970s to the overvaluation of stocks in the 2000s,” says Merryl. There was a spillover with the mid-decade house price boom followed by the commodity boom in 2008.
What is behind this fall?
Trying to explain why the financial markets underperformed in the period 1999-2009 will be as difficult as predicting their performance over the next ten years. Merryl thinks that the poor stock market results are more due to the overvaluations of stocks at the beginning of the decade than to the weakness of the real economy during the same period. Although he notes that the economy has also been boosted by excessive household borrowing.
Hirsch believes the determining factor for the scholarships was the September 11, 2000 terrorist attack and the US government’s very onerous involvement in the wars in Afghanistan and Iraq. The Vietnam War contributed to the stock market decline of the 1970s, while the Second World War kept the markets at very low levels in the 1940s. of dollars. Today with the changes in the composition of the index, its overall value now stands at 10,000 billion dollars.
Have companies become less wealthy in 2009 than they were in 2000? Rob Lutts the founder of Cabbot Money Mangement. “They have created enormous values over the past ten years that are not reflected in their stock prices today”
No other way out except the rise?
Hope for a better tomorrow on Wall Street. And some investors are betting that the weakness of the 2000s will produce fabulous profits in the next decade. This is the historical model. “Nine times out of ten, a bad decade is always followed by a very good decade,” says Merryl. “Be a risk taker,” he adds. Lutts meanwhile says “nobody wants it, it’s a contrary point of view”
Markets have the potential to do better according to Bodie, but it is impossible to predict the future with any evidence and for many people it does not eliminate market risk”.
In 1969 investors were unable to predict the oil shock of the 1970s. Just like in 1999, forecasters were unable to predict the wars and stock market shocks that the world has since experienced.
In 2009 investors are uncertain about the future stock market. Those willing to make big bets could win or face another decade of dashed hopes and astronomical losses.