A 10-Year Stretch That's Worse Than It Looks By FLOYD NORRIS

February 7, 2009
Off the Charts
A 10-Year Stretch That's Worse Than It Looks By FLOYD NORRIS

IN the last 82 years — the history of the Standard & Poor's 500 — the stock market has been through one Great Depression and numerous recessions. It has experienced bubbles and busts, bull markets and bear markets.

But it has never seen a 10-year stretch as bad as the one that ended last month.

Over the 10 years through January, an investor holding the stocks in the S.& P.'s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart.

Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent.

That decline was strongly influenced by inflation. Ignoring inflation, stocks over that decade returned half a percent a year, not a very good showing but not a loss. But with inflation taking off, the real, inflation-adjusted return was negative.

For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.

Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure — which may say as much about the measure as it does about the performance of the stock market. The deflation of the 1930s helped the after-inflation of the stock market to look better.

For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.

Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.

The numbers in the chart assume that the Consumer Price Index was unchanged in January from December. But the accuracy of that assumption does not matter. Even if consumer prices rose or fell sharply during the month, the decade would still have been the worst one.

The decade was not a smooth one. It started with the market nearing the peak it would reach in early 2000, as the technology stock bubble expanded. Prices tumbled through late 2002, then doubled from those depressed levels by late 2007. Since then, a rapid decline has brought them back close to the lows of 2002 before considering dividends and inflation.

Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started.

Many things influence stock prices, of course, and there is no guarantee that continued economic and financial woes will not drive the market down from here. But long-term investors may be able to take comfort from the fact that bad decades are often followed by 10-year periods that are better than the long-term average, which shows a gain of 6.2 percent a year.