Why ‘lost decade' forecasts can signal a new bull market

The Charging Bull in New York. Talk of a lost decade commonly comes shortly before bull markets erupt. AFP

What rebound? Inflation, geopolitical rancour, profligate government spending — doubters foresee a suffocating swirl of headwinds keeping stocks from bouncing back much now … or in 2023 … or anytime in the 2020s.

They predict a “lost decade” of stagnant returns, necessitating radical portfolio changes.

Anyone forecasting a decade into markets’ future is fooling themselves. It can’t be done.

“Lost decade” talk typically comes shortly before bull markets erupt (and continues after). Counterintuitively, “flat future” forecasts are beautifully bullish.

“Lost decade” doomers ignore investing legend Sir John Templeton’s sage counsel: “The four most expensive words in the English language are ‘this time it’s different’.”

They see current problems as insurmountable instigators of a “new normal”. But “new normal” thinking isn’t new. It typically surfaces near market bottoms, after bear markets crush sentiment.

Take 2020. Covid-19 supposedly forever changed life and markets for the worse … before a bull market roared.

Or early 2009. Proclamations of a low-return “new normal” blared … yet world stocks soared 73 per cent from March’s low through to the end of the year, even amid a continued fear of US mortgage fallout, souring city and state debts, high unemployment and more.

Now, it starts again amid an intertwined web of doubts: how can markets overcome nosebleed inflation, central bank tightening and governments deluged with debt?

Most believe this will drive interest rates up, sapping demand for stocks.

But remember: markets and economies are inherently cyclical — and adaptive.

Moreover, “lost decade” trumpeters ignore history. US stocks soared 17.5 per cent annualised in the 1980s while 10-year US Treasury yields averaged 10.6 per cent! The 1990s had 6.7 per cent average 10-year yields and 18.2 per cent annualised returns.

What I call the “Pessimism of Disbelief” — the tendency for investors to focus on negatives and dismiss positives after big downturns — makes investors forget.

Is a “flat decade” possible? Sure, but so is a flat century. That said, investing isn’t about far-flung possibilities — it is about probabilities.

In assessing a “lost decade’s” probability, consider the evidence: using the S&P 500 for its long data history, price returns were “flat” (below 15 per cent cumulative return in US dollars) in only 18 per cent of rolling 10-year periods since 1925. They were negative in only 12 per cent of them.

More rolling 10-year periods (15.3 per cent) exceeded 200 per cent returns.

Most flattish stretches clustered around the Great Depression and the Second World War — from 1936 to 1948, about 60 per cent of rolling 10-year periods were flat.

Today is light years from then.

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Moreover, price returns unrealistically mislead. Any diversified investor also earns dividends.

So, now consider total returns — price movement plus dividends: since 1925, only 7 per cent of rolling 10-year S&P 500 total returns were flat or negative.

Dividends cut the Depression’s flat-to-down periods in half. Several 1970s occurrences vanish outside 1973-1974’s bear market depths.

Even rare “flat” decades aren’t truly flat or L-shaped.

After the 1929-1932 monster plunge, US stocks soared 324 per cent in price terms through 1937. The 2000-2009 “lost decade” was flat overall because one bear market started in its first year and another bottomed in its last. But in between, a big five-year bull market raged.

And, crucially, no one predicted a flat decade in 2000 — most foresaw a golden “new economy”, not a bleak “new normal”.

Anyone forecasting a decade into markets’ future fools themselves. It can’t be done.

Ken Fisher,
founder, executive chairman and co-chief investment officer of Fisher Investments

Those forecasts arrived in 2009 — and fell fully flat. World stocks’ 2009—2020 bull market delivered 341.8 per cent in returns. Some lost decade!

Stocks move on supply and demand, as with any asset. Far-ahead predictions typically ignore supply, the more crucial long-term driver.

Initial public offerings, bankruptcies, buy-backs, mergers — these supply forces hinge on regulatory shifts, future sentiment and other factors unforecastable far in advance.

This is one reason stocks mainly factor into prices businesses’ outlooks over the coming three to 30 months.

Anything beyond is too murky. Hence no one can know if the next decade will be subpar — but history shows the journey won’t be flat. Opportunities will abound.

Bear markets end in Ws or Vs — not Ls — usually with quick returns to prior highs.

Again, using US stocks for their long history, the median time for new bull markets to surpass pre-bear market highs is 9.8 months. Yes, individual recoveries vary widely.

And perhaps this bear market isn’t done. But when stocks have pierced minus 25 per cent from bull market peaks — as they did in September — returns were positive a year later six out of nine times.

The down periods: 1929, 1937 and 2008. Today looks nothing like those.

So, welcome rising “lost decade” cries. They aren’t harbingers of doom but, instead, a recurrent feature of cyclical markets, sapping sentiment and teeing up positive surprises that spur new bull markets.

Fathom that today to capture the coming rebound.

Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $160 billion of assets under management