Tuesday, January 10, 2012

booms and busts

After booms come busts, and after busts come booms. Happens over and over.

Going back to 1820, stocks have never produced two consecutive decades of real losses. After a decade of losses (like we just experienced), the worst subsequent 10-year return we've seen is about 12% a year. That's a hefty return by any measure. [The chart doesn't bear that out. The 1880's lost -7.9% while the 1890's gained 13.4%. I assume that's total return, far from 12% a year. Remember that 2000 marked the peak of the bubble, so it's no surprise that the decade hence was negative. Didn't realize how negative. The Nasdaq I'm sure was quite a bit more negative. Remember it hit 5000 and now 12 years later it's still only 2700.]

Of course, history isn't guaranteed to repeat itself. And what drives stocks to a decade of low or high returns isn't the calendar; it's valuations. Stocks do well after they're cheap, and poorly after they're expensive. So the real question shouldn't be how long stocks have been stagnant, but whether they're cheap.

That's a matter of constant debate.

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