Last week Tony wrote about “The ’99 Rolloff“.  He discussed 10-year returns, and the “lost decade” we just experienced.  Although the last 10 years in the stock market have been disappointing, the next 10 years should be better for investors.

Historically, periods of recovery have followed disappointing periods.From 1928-2008 there have been ten 10-year periods where the stock market has returned less than 5%.In every case, the 10 years following these disappointing periods produced satisfactory returns.These periods of recovery averaged 13% per year and ranged from a low of 6.6% to a high of 18% per year.
It is also important to remember that lower prices may increase future returns.Consider two times in history.The first is March 2000:

  • The Dow is at 11,119
  • With a trailing P/E of 25
  • A dividend yield of 1.5%
  • And a trailing 10-year return of 17.9%.

The second is March 2009:

  • The Dow is at 7,609
  • With a trailing P/E of 10 to 14
  • A dividend yield of 3% to 4.4%
  • And a trailing 10-year return of -0.4%.

In March of 2000 future return expectations were high, we saw record inflows into stock mutual funds and investor sentiment was euphoric.The next 10 years produced a dismal return of -0.4%Compare March of 2000 to the environment in March of 2009.Now the future return expectations are low, we have seen a massive level of redemptions in stock mutual funds and investor sentiment is that of despair.We do not yet know what the next 10 years will produce, but with a P/E that has been cut in half and a dividend yield that has been doubled, we are betting that the next 10 years will look much better than the last 10 years.~AdamSources: Thomson Financial, Lipper, Bloomberg, Davis Advisors