TCS Daily

A Down Year? Maybe. But Let’s Put It in Perspective

By James K. Glassman - December 11, 2000 12:00 AM

With just three weeks left to go, the year 2000, it now appears, will produce the first losing year in the stock market in a decade. Don't get me wrong. I am not counting this millennial year out. As I write this, on Thursday, the Standard & Poor's 500-Stock Index, which is the best gauge of the market as most investors know it, is off about 7 percent, after accounting for dividends. A 7 percent move in three weeks is far from impossible. The Nasdaq jumped 10.5 percent in a single day.

But for the sake of argument, let's say that the market does finish down about 7 percent. What does that mean for long-term investors? Absolutely nothing, except perhaps that the market has created some wonderful bargains. If you invest the right way -- buying great companies (in technology and other areas) and holding them for a long time in diversified portfolios -- then the vagaries of the market over the course of a few months or even a few years are best ignored. You can ride out the rough times - which always appear - and, in the end, benefit from the growth of profits and of the economy as a whole, both facts of life for the past 100 years or so.

Still, if this is a losing year, we are going to hear a lot of I-told-you-so monologues from the bears and from the myopic financial press. So this is a good time to put a negative 2000 into perspective.

Between 1926 and 1999, according to the excellent series of statistics prepared by Ibbotson Associates of Chicago, the S&P (and its large-cap predecessor) has produced negative returns (when dividends are taken into account) 20 times. That's roughly one year in every four. But recent years have been very different. The S&P has not declined since 1990, when it dropped a mere 3.2 percent. Before that, it last declined in 1982, when it was down 4.9 percent. In the 1970s, the S&P produced negative returns in three out of 10 years; the same for the1960s. The worst decade was the 1930s, when stocks fell in six years.

In the 1930s, stocks suffered because of terrible monetary policy. The Fed believed that the way to get the economy moving was by tightening the money supply - that is, raising interest rates. Monetary experts learned their lesson. If we assume that the 1930s were an anomaly and begin our sample in 1942, then there were only 11 down years out of 58. Stocks fell, then, in 19 percent of the years. Between 1926 and 1941, there were nine down years out of 16, so stocks fell in 56 percent of the years.

The question is whether times have changed, and I think they have. The world is a different place from what it was in the '20s, '30s and '40s, and even very different from the 1960s and '70s. Since 1982, the Dow Jones Industrial Average - 30 blue-chip stocks that, until recently lacked a significant high-tech component other than IBM - has gone from 777 to well over 10,000. That a 13-fold rise, or 20-fold including dividends, in just 18 years.

Is 2000 an anomaly? Not really. Bad things happen to good stock markets. Then, is a poor 2000 a harbinger of poor years to come? I seriously doubt it. Technology has changed the U.S. economy for the better. We produce better goods more cheaply. Productivity rises, risk declines and the value of assets soars.

No, it won't go on forever - only until the market is fully valued. But, according to my calculations and those of my colleague Kevin Hassett, we're still a long way from that condition. Stocks can triple very fast before they get too expensive.

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