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Home Uncategorised

Another ‘lost decade’ is a possibility

by Ram Balakrishnan
February 8, 2010
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Some stock investors are eternal optimists. Jon Chevreau recently blogged about an UBS Wealth Management report that noted that every ‘lost decade’ was historically followed by a rebounding market — the 1910s were followed by the roaring 20s, the 1930s by a modest rebound in the 1940s and the 1970s by the spectacular bull markets of the 80s and 90s.

Unfortunately, the picture may not be quite as rosy as UBS makes it out to be. In his latest market commentary, Jeremy Grantham points out why stocks can only be expected to deliver modest returns over the near future:

Going into this next decade, we start with the U.S. overpriced, so do not be conned into believing that every bad decade is followed by a good one. It happened historically because when bull markets peak at only 21 times, a bad decade’s return will always make them cheap. This does not necessarily apply to a decade that started at 35 times! A decade’s poor performance can still leave you expensive (as this one has) when it starts so overpriced. We did, however, come close to having good numbers for the next decade: just 9½ months ago we had felt enough pain to make the next decade’s prospects look very good indeed, almost everywhere more than 10% (annualized) plus infl ation on our 7-year forecast. (A decade forecast would be only a little less impressive.) All of this was ruined by a rapid 65% rally, which took more than 7% a year off our 7-year forecast!

Mr. Grantham expects US large cap stocks to return just 1.3% in real-terms over the next seven years.

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