Wednesday, December 30, 2009

The Oughts—A Lost Decade?

While we’re eager to move forward, the start of the ‘10s is a good moment to reflect on where we’ve been. And this decade was anything but boring.

The world didn’t end as advertised with Y2K. And three months following that non-event, the exuberance of the Tech boom gave way to a crash. March 2000 marked the decade’s first bear. A short, shallow recession followed a year later—March 2001 through November 2001—though the bear market was fairly brutal, ending with a second bottom in March 2003.

A bull market followed for over four years. And, as is typical, a variety of fears failed to derail the bull.

2003: The Iraq War began. Some mutual funds were found to be engaging in overnight trading, which erupted into a major scandal and fears of widespread corruption. SARS was feared to explode into a deadly pandemic. World stocks rose 33%.

2004: The US dollar started tanking, and the whole world feared America’s big and ballooning triple deficits—trade, budget, and current account—would drag the world into another recession. It didn’t happen. World stocks rose 15%.

2005: Oil was on the rise—hitting a historic $70. Those who believe high oil is bad for stocks braced for a bear market that never came. Then, Hurricane Katrina effectively wiped out a US city, doing billions of dollars in damage, and displacing hundreds of thousands. Global stocks had an OK year—up 9.5%

2006: North Korea started saber rattling in earnest, even testing nuclear weapons. The dollar was weak yet again. The Iraq War entered its third year and things looked bleak. And there was nonstop talk of a US housing bubble. World stocks boomed 20%.

2007: The war in Iraq dragged on as housing bubble fears reached a fevered pitch. Banks who’d made bad bets on subprime loans began raising capital. No one knew it then, but globally, stocks had reached their peak and began grinding down. Still, for the year, stocks rose 9%—besting other similarly liquid alternatives.

By December 2007, the US entered its second recession of the decade and the world followed. Stocks ground slowly down, picking up speed in 2008. With Lehman’s failure, stocks began falling in earnest. Though earlier in the year, Bernanke and Paulson hatched late night deals to save AIG and Bear Stearns, they simply let Lehman go—with no explanation for the distinction. A true crisis followed as credit markets froze, exacerbating the recession and what had been a fairly smallish bear.

The decade was bookended by recession, leaving world stocks overall flat—hence the “lost decade.” But this implies stagnation—not what we saw. Steep drops were supplemented by significant rises—the bull market of 2002-2007 saw a return of over 150%. Few would’ve wanted to miss that.

While it’s human nature to want to assign meaning to nice round numbers, analyzing stock returns by 10-year periods is arbitrary—it just so happens this period included two big bears. Negative returns over a 10-year period are rare in stock market history. And when they have occurred, they’ve unfailingly been followed by positive returns.


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