Long Road Back

After the Crash, Stocks May Face Long Road Back, that’s the title of an article in the WSJ’s personal finance section.  It refers to research from professor Elroy Dimson at the London Business School.  Based on analysis of 17 markets around the world looking back to 1900, Dimson “estimates that we’ll have to wait nine more years before the Dow average, including dividends, has a 50% chance of hitting its 2007 highs.”

That makes for a long secular bear market. Not the longest we’ve had since 1900, but painful nonetheless.  Here are some highlights:

The report hammers home another uncomfortable truth. The belief that stocks become virtually riskless if you just hold onto them long enough — popularized a decade ago in books like Jeremy Siegel’s “Stocks for the Long Run” and James Glassman and Kevin Hassett’s “Dow 36,000” — has been shattered by reality.

Since 1900, there have been four global bear markets in which stocks have fallen by at least 40%, adjusted for inflation. Two have occurred in the past nine years alone. Stocks are risky not merely because their returns are variable, but because they can wipe you out at various points along the way.

It may be a long time before investors are again willing to value stocks at much higher than the long-term average of 15 times earnings.

Since 1900, U.S. stocks have averaged a 6% annual return after inflation. If you knew nothing else — and none of us do — then that should be your forecast of the return on U.S. stocks over the long term. That’s measured in decades. In the short run, as just about every investor now realizes, anything can happen.


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