Traders work on the floor of the New York Stock Exchange during morning trading on Nov. 17.Michael M Santiago/Getty Images/Getty Images
The spectre of a lost decade for the stock market is rattling its chains once again.
Every so often, Wall Street sentiment converges on the idea that the stock market is on the cusp of a dark era stretching years into the distance, during which investors will be lucky to realize positive returns.
These portents of doom tend to crop up in the middle of a corrective phase after a long bull run. Spoiled by the lucrative returns of a boom cycle, investors are unprepared for the epochal change at hand, the argument goes.
This time around, the sustained sideways grind of stock markets envisioned by strategists is predicated on the fear that today’s economic strains – slowing growth, high inflation, climate change, etc. – will not be so easily overcome.
Get ready for the new normal, they say.
The problem is that there is very little precedent for a lost decade in stocks. Rolling 10-year periods with flat or negative returns in U.S. stocks are exceedingly rare, especially after factoring in dividends.
“If I were to hazard a guess, returns over the next decade are likely to be proximal to historic returns,” said Garey Aitken, chief investment officer at Franklin Bissett Investment Management.
“There’s a big camp that for some reason thinks we’ve got low single digits coming our way, like it’s preordained.”
There are some influential names in that camp.
Billionaire investor Stanley Druckenmiller: “I wouldn’t be surprised – in fact, it’s my central forecast – the Dow won’t be much higher in 10 years than it is today,” he argued, pointing to the reversal of years of easy-money policies.
Hedge fund manager Ray Dalio: A lost decade for stocks is possible, as “it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be.”
Stifel’s chief equity strategist Barry Bannister: Investors should expect “a fairly weak decade return – low single digits at best,” based a prolonged period of higher commodity prices biting equities.
Société Générale’s global strategist Albert Edwards: “The party for investors is over.”
And speaking to the New York Times in May, Mark Zandi, chief economist at Moody’s Analytics, said that as the stock market loses its power to make people money in the coming years, its stature and profile will also diminish. “As it gets less exciting and the returns more pedestrian, its role in our financial life will not be as large.”
That kind of eulogizing seems to be common in moments of stock market malaise, when investor morale is low and it’s easy to extrapolate the current pressures into the future. It’s especially tempting when contemplating the end of a golden era for investors.
The 10 years up to the end of 2021 saw the S&P 500 index post annual compound returns of 17 per cent. Who’s to say the snapback to that grand decade won’t be just as forceful in the other direction?
“You do tend to see some mean reversion,” said Sadiq Adatia, chief investment officer at BMO Global Asset Management. “But that doesn’t mean you’re going to lose an entire decade of performance.”
The stock market can go through very long periods where decent returns are hard to come by. The term “lost decade” is most often applied to the 2000s, when the S&P 500 finished the decade lower than it started. But that has as much to do with unfortunate start and end points – from the dot-com market peak to the financial crisis bottom, roughly speaking. Between those two points, there was a substantial bull market.
But even the lost decade of the 2000s looks much better once you price in dividends. A recent analysis by U.S. asset manager Hartford Funds found that the decade’s negative annual return rises to 1.8 per cent after dividend payouts.
Diversified investors would have also realized decent returns from international stocks over that time. Ultimately, decade-long stretches of flat stock market performance are rare enough as to be wildly improbable.
It’s much more likely the next 10 years will see a couple of big bear markets, by pricing in a sudden burst of pessimism about the future in relatively dramatic fashion.
“The market tends to have those big cathartic, cleansing events,” Mr. Aitken said. “We see the capitulation, then the market just gets on with things.”