Is a lost decade looming? A growing chorus of commentators claim the last nine months’ morass portends many years of struggle, arguing stocks are doomed to a long, lackluster stretch of nothingness—necessitating radical investment changes. Nonsense. No one can know what the next decade holds even wildly. I surely don’t. But, I do know “lost decade” fears are ever present-common around bear market lows and early bull markets. They say more about sentiment than what 10 years of tomorrows hold. Let me detail that for you.
Lost decade fears stem from the wrongheaded idea current problems are too big and bad to overcome—extrapolating 2022’s poor returns years forward. This kind of “new normal” thinking arises frequently around market bottoms, after bear markets crush sentiment. Scarred investors claim current problems are intractable—a sea change dragging stocks down…keeping them there.
It is happening now, with 2022’s myriad fears fanning lost decade forecasts. Most argue elevated inflation and rising interest rates will be longer term, eroding stocks’ attractiveness. Maybe! But this merely extrapolates current conditions in a linear manner. It doesn’t account for potential shifts or markets’ and economies’ inherent cyclicality and creativity. It also assumes 10-year rates at 3%, 4%, even 5% prevented past bull markets. Not so! Consider the 1980s and 1990s. Stocks soared both decades, despite 10-year yields averaging 10.6% and 6.7%, respectively. Those decades saw annualized 17.5% and 18.2% S&P 500 returns, respectively. People forget—the “Pessimism of Disbelief”—which I detailed here in June—obscure views of the present and far-future.
Investing is a probabilities business. Flat decade forecasts disregard this, using weak evidence to argue for something wildly improbable. Consider: Since good S&P 500 data begin in 1925, rolling 10-year price returns were only “flat” (lower than 15% cumulative return) about 18% of that time. Just 12% of price returns were negative. Those periods also cluster, including a longer flat-to-down period amid the Great Depression and WWII. From 1936 to 1948, nearly 60% of rolling 10-year periods were flat. Other lost decades? 2000 – 2009–and a few in the 1970s, too.
That sounds bad! But no diversified equity investor earns price return only. Total returns, which include dividends, paint a truer picture. Since 1925, rolling 10-year total returns were flat or negative just 7% of the time. 7%! Dividends cut the Depression’s flat-to-down periods in half! Most of the 1970s’ occurrences vanish outside the depths of 1973 – 1974’s bear market.
Simply said, there is no precedent—zero, zilch—for stocks falling and remaining “flat” for 10 years straight. A pure, L-shaped decade has never happened. After 1929 – 1932’s monster bear market, stocks soared 324% in price-only terms through 1937. Nor was 2000 – 2009 L-shaped either—it was a flat decade by happenstance, based on one bull market peaking in the decade’s first year and a bear market bottoming in its last. Calling that a “lost decade” glosses over the bull market in the middle. That episode is also instructive: No one predicted a flat decade in 2000—most said just the opposite! Then they said, “It’s the internet, stupid.” “New normal” and “lost decade” chatter didn’t begin until after the global financial crisis. Meanwhile, 2009’s dire predictions fell very, very flat. The S&P 500 bull market ran from 2009 – 2020, delivering 528.9% returns. Some lost decade!
Why can’t anyone forecast a decade out? The effort overlooks markets’ nature. Stocks move on supply and demand, like any asset. Far-ahead forecasts typically focus exclusively on demand, ignoring stocks’ more crucial long-term driver: supply. IPOs, bankruptcies, buybacks, mergers—all these influence supply, and hinge on regulatory shifts, future sentiment and myriad other factors. Those aren’t predictable far in advance—I’ve never seen anyone even try. That is a key reason stocks move on factors mainly impacting businesses over the next 3-30 months. Anything beyond is too murky. Maybe the next decade is subpar—but you can’t know it now—or how. History shows the journey won’t be “flat” anyway. Hence, opportunities will abound.
So tune out dire-decade doomism. Bear markets end in Ws or Vs—not Ls. No matter which, the upswing starts a new bull market, and the return to prior highs generally doesn’t take terribly long. The median bull markets to reach and start surpassing pre-bear market highs is 9.8 months. Yes, there is big variance between the fastest and slowest recoveries. And, yes, perhaps this bear has far farther to fall. But when stocks have historically pierced -25% from a bull market high—as they did in late September—returns were positive a year later 6 of 9 times. Two of those down periods were 1929 and 1937. The other was 2008. Today looks nothing like those.
Counterintuitively, lost decade fears are bullish—they demonstrate excessive and irrational pessimism. People always see bear markets as generational, lasting shifts for the worse. They aren’t. They are recurrent, cyclical and corrective. Yet cataclysmic proclamations are common around their lows, portending positive surprises that fuel new bull markets. Look to that now and forget any unforeseeable “far future” nonsense.
