How Bad Were the Naughties?

The 2000s (the “naughts,” or “naughties”) were really, really bad for the investor in US stocks (especially large cap stocks).  I mean really bad. Even worse than a lot of people realize.

Breaking down the bad

Kicking off the Great Depression, the stock market began to fall in September 1929. Here are the 10 year returns of the S&P 500 following September 1929.  Let’s compare these returns to those following the tech crash that started in spring of 2000.

Ten years following  September 1929:

Total Return:  -39.80%

Ten years following April 2000:

Total Return:  -6.35%

Sounds like the 1930s were a lot worse than the 2000s. But hold on.

Adjust for inflation

In the Great Depression there was deflation. This makes the returns during that time period not look so bad. For example, if your portfolio drops 50% but your dollar can buy twice as much, you are basically at even, from a purchasing power perspective. Let’s see what happens to the returns of the S&P 500 when we adjust for inflation.

Ten years following  September 1929 (inflation adjusted):

Total Return:  -24.55%

Ten years following April 2000 (inflation adjusted):

Total Return:  -26.39%

Whoa! On an inflation-adjusted basis, the S&P 500 did worse for the 10 years immediately following the tech crash than it did for the 10 years following the start of the Great Depression.

Adjustments to consider

It is interesting to note that the Cyclically Adjusted PE Ratio, used by Robert Shiller of Yale, was 32.56 in September 1929. This ratio was 43.53 in April of 2000, indicating that the market was even more “expensive” in 2000 than it was in 1929. Based on this, you might have logically expected returns following April 2000 to be worse.

Now, there were some other good things going on during the 2000s. Real estate prices went up a lot. Foreign investments, especially emerging markets, were up huge. A globally diversified investor would have done all right during this decade. There are a lot of elements that made the 2000s much milder than the 1930s.

Still, for large company US stocks as shown by the S&P 500, the investment returns on an inflation adjusted basis were worse in the 2000s than during the Great Depression.

Could the Great Depression happen again? It just did

When I work with clients I discuss bad-case scenario events and show them examples of the Great Depression. I sometimes find the investing public and other financial advisors are somewhat dismissive of what happened in the Great Depression, as if it was so long ago or such an extreme event that it couldn’t happen again. Could the Great Depression happen again?  In a certain way, it just did.

On a side note, I am not trying to scare anyone from investing in stocks by this.  On the contrary, getting into stocks just after a very bad decade has historically turned out very well. But just don’t go it alone.

Image is S&P 500 inflation adjusted growth, April 2000 through March 2010