Sunday Musings: A Down Decade

Most investors don’t realize that market returns, as measured by the S&P; 500, are in negative territory for this decade.

In other words, even money under your mattress would have done better than having been invested on a buy and hold basis in the major indexes.

MarketWatch featured a story on the subject a month ago, but it is still as valid as it was then, especially with the markets having been in correction mode recently. Take a look at some highlights of “To finish the decade in the black, S&P; has its work cut out:”

After back-to-back 15% gains that made for the best two quarters since the first half of 1975, the S&P; 500 Index needs to advance another 39% for the index to break even for the decade.

On Thursday, the odds of that scenario panning out seemed even more dicey, with the U.S. stock market starting off the first day of the final quarter of the year by taking its biggest single-day hit since the prior quarter began.

“Thirty-nine percent is an enormous amount,” said Howard Silverblatt, senior index analyst at Standard & Poor’s. “I would not want to take that bet.”

The stock market has “gone a long way without a correction,” added Silverblatt, who also pointed out the S&P; 500 would need to advance 159% in the final three months of the year “to beat your brother-in-law who put the money in a 10-year Treasury.”

Again, Webb concurs. “On Jan. 1, 2000, the 10-year bond yield was at 6.66%. Today it’s at less than half of that, at 3.19%. And what has the equity market done for you? Fixed-income would be preferable,” said Webb.

While volatile, U.S. equities have basically “gone nowhere over 10 years, although it’s been a hell of a wild ride in between,” said Webb.

Among the S&P;’s 10 industry groups, energy advanced the most from Dec. 31, 1999, through Sept. 30, 2009, with the sector climbing more than 92% and in need of a 48% drop to finish the decade at neutral. Conversely, telecommunications fell more than 66% during the not-yet-finished decade, with the sector in need of a 198% boost in the final three months to break even.

Sure, the market rebound of 2009 has been impressive by any measure, but for the S&P; to gain an additional 39% in the next 2 months is highly unlikely. It only took two bear markets in 10 years to destroy portfolio returns, which supports my view that is far more important to avoid the big drops in the market than to be permanently invested in the “best” funds.

With the recent pullback, even the odds of the S&P; reaching the level of our sell signal on 6/3/08 (1,318) are remote at best. As of Friday, the S&P; (1,036) would have to gain over 27% just to get back to that break even point.

Chances are pretty good that, given the general state of the economy, the next decade will bring more of the same.

Personally, I believe that we will see more stunning rallies, as the economy allegedly improves, only to be followed by jaw dropping pullbacks as reality proves otherwise. In other words, recoveries based on the “WW” concept (up-down-up-down) are very likely in my opinion. As a result, those investors simply buying and holding will again be left holding an empty bag.

Follow the trends unemotionally, get in when the markets confirm upward momentum, and get out when your trailing sell stops tell you to do so. This will be your best opportunity to deal with the ever increasing uncertainties in the market place.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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