Amid all the chatter about E.S. Browning's big think piece in this morning's Wall Street Journal on the last 10 years in the financial markets, we'd like to make a few simple points. Let's begin with the opening passages from Browning:
Over the past 200 years, the stock market's steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.
The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.
The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.
First, notwithstanding the protestations of a few CNBCers* that Browning's story has them "depressed" today, this isn't news to anyone who's been paying even the slightest attention. As we noted on March 3rd in a piece on Warren Buffett's annual letter, back in the Summer of 2004, the Financial Times ran "Buy-and-hold on permanent hold," a piece that compared the experience of the early 2000s to the equity plateaus of the 1930s and 1960s/70s. (To compare these episodes, check out this slick trio of charts from the WSJ.)
Second, we think the primary headline on the Browning piece--"Stocks Tarnished by 'Lost Decade'"--is backward. For investors looking forward from this point, stocks have actually regained some of their luster...because the multiple compression of the last several years has improved their expected future returns. Which isn't to say that the process of multiple compression has run its course. We think more of the same lies ahead. But relative to where equities were valued in 1999 and early 2000...the last few years have made big-cap U.S. stocks more compelling in the medium term (i.e., a full market cycle) relative to certain asset classes that have clearly outperformed S&P 500-style securities. For a comparison of several major asset classes, see the adjacent WSJ graphic. Again, this does not constitute a near-term prediction about asset class performance. It's a bigger-picture argument about relative valuations and reversion-to-the-mean.
Third, as the adjacent table shows, and as any responsible participant in the capital markets knows, large-cap U.S. equities are just one asset class. So yes, if someone owned only an S&P 500 index fund (or only actively managed funds benchmarked to the S&P 500), the last nine years would have amounted to very little indeed. But prudent investors weren't so wildly over-allocated to big-cap domestic stocks, and intelligent rebalancing, let alone (as Browning points out) an ongoing process of dollar-cost-averaging, would have delivered substantial benefits over the last several years, both in terms of risk management and improved returns.
Fourth, John Bogle was exactly right this afternoon in his interview with Erin Burnett: Periods of muted returns make the management of expenses--and of investor behavior--more important than ever.
*Overheard: Kneale and Burnett. We suspect more such claims were made while we weren't listening.
E. S. Browning, "Stocks Tarnished by 'Lost Decade'," Wall Street Journal, March 26, 2008 (subscription required)
Elizabeth Wine, "Buy-and-hold on permanent hold," Financial Times, August 30, 2004