The New Normal is Not So New
Markets move on even when some investors don’t
The 2008 global market crisis and the struggling economy have left many investors anxious, fatigued and cynical. Even with two years of strong equity returns since March 2009, some investors have been slow to regain market confidence. Many have accepted the idea of a “new normal” where stocks are doomed to lower returns in the future.
The concept of a new normal is anything but new. In fact, throughout modern history, periods of economic upheaval and market volatility have led people to assume that the world had fundamentally changed, disabling the engines of growth needed to propel the stock market forward.
These waves of pessimism and retreat may be natural reactions to difficult and confusing times, but acting on them has often backfired for investors. Let’s look at periods when investors had compelling reasons to give up on stocks, and what happened thereafter.
1932: Depression
The US stock market had just experienced four consecutive years of negative returns. A 1929 dollar invested in stocks was worth only 31 cents by the end of 1932. The Great Depression left many people sure that the economy had permanently changed. Amid what is considered the roughest economic time in US history, many investors left the market, and some would not return for a generation.
US Stock Market Performance after 1932*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 15.35% | 10.07% | 13.19% |
| Growth of $1 | $ 2.04 | $ 2.61 | $ 11.92 |
1941: War
World War II was raging, and the US had just entered the conflict. The US stock market had experienced two consecutive years of negative performance, and the economy had shown signs of sliding back into depression. With no idea of how long the war would last or its ultimate outcome, and extreme government interventions into the economy (rationing, price controls, directed production, etc.) the stock market seemed like a huge gamble to many.
US Stock Market Performance after 1941*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 18.63% | 16.67% | 16.29% |
| Growth of $1 | $ 2.35 | $ 4.67 | $ 20.47 |
1974: Inflation
Investors had just experienced the worst two-year market decline since the early 1930s, and the economy was entering its second year of recession. The Middle East war and Arab oil embargo in late 1973 drove crude oil prices to record levels and resulted in price controls and gas lines. President Nixon had resigned from office in August over the Watergate scandal. Annual inflation in 1974 stood at 11 percent, and with mortgage rates at 10 percent, the housing market was experiencing its worst slump in decades. With prices and unemployment rising, consumer confidence was weak and many economists were predicting another depression.
US Stock Market Performance after 1974*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 17.29% | 15.92% | 14.89% |
| Growth of $1 | $ 2.22 | $ 4.38 | $ 16.07 |
1981: Stagflation
Sometimes even good market performance seems like bad news. The stock market had delivered strong positive returns in the late 1970s, but investors were weary from stagflation, characterized by high inflation, anemic GDP growth, and unemployment, and from fears of another economic downturn. In late 1980, gold climbed to a record $873 per ounce—or $2,457 in 2010 dollars. Memories of the 1973–74 bear market lingered. A 1979 Business Week cover story titled “The Death of Equities” asserted that inflation was destroying the stock market and that stocks were no longer a good long-term investment.
US Stock Market Performance after 1981*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 18.82% | 16.58% | 14.54% |
| Growth of $1 | $ 2.37 | $ 4.64 | $ 15.11 |
1987: Black Monday
On October 19, 1987 the Dow Jones Industrial Average plummeted 508 points, losing 22 percent of its value in the worst single day in market history. The plunge marked the end of a five-year bull market. The event shook investor confidence, scared many out of the market, and raised concerns that destabilized markets would increase the odds of recession.
US Stock Market Performance after 1987*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 16.16% | 17.75% | 11.89% |
| Growth of $1 | $ 2.11 | $ 5.12 | $ 9.46 |
2002: Dot-com collapse and 9/11
By the end of 2002, investors had experienced the stress of the dot-com crash, the shock of the September 11 attacks, and the early stages of wars in Afghanistan and Iraq. Through three years of negative performance investors experienced an estimated $5 trillion in lost market value. A younger generation of investors had its first taste of old-world risk in the “new economy.”
US Stock Market Performance after 2002*
| 5 Years | 10 Years | 20 Years | |
| Annualized return | 13.84% | -- | -- |
| Growth of $1 | $ 1.91 | -- | -- |
2011: Memories linger
The cruel market slide that began in 2008 seemed like the end of the world. Even with the dramatic reversal – a gain of 83 percent from March 2009 through 2010 – the wounds of the financial crisis and mortgage mess are still healing. With today’s headlines echoing past concerns about government spending, inflation scares, rising oil prices, economic stagnation, high unemployment, and market volatility, many investors are again (or still) questioning stocks as a long-term investment.
So are we facing a new normal? For that matter, was there ever really an old normal? The data tells us that normal is a moving target, unconstrained by patterns and impossible to predict. The average annual return of the market since 1926 has been 9.67 percent, but as the chart below indicates, the return in any given year is typically well above or below average.
It also shows that only in four periods has the market had two or more consecutive years of negative returns. Investors with the patience and composure to endure the negative periods have typically seen good returns in the years that followed.
That may be normal, but it doesn’t seem so new.
© 2011 Bright Sky Group, LLC. All rights reserved.
*Returns for all periods of the CRSP 1-10 Index are annualized. Data provided by the Center for Research in Securities Prices, University of Chicago. Data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). Additionally, includes US Treasury constant maturity indices. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.
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