The Lost Decade?
by Jay L. Gershman
August 5, 2010
Well, by now you may have noticed that I have been relatively non-communicative. Yes, I have to admit, I have. Call it turning 50, call it mid-life crisis, call it temporary market ho-hum, or maybe call it tired of saying the same thing. In any event, thank goodness my silence is over!
Actually, I decided to address my recent pet peeve, people who are attached to the saying that the last ten years have been "the lost decade." Saying that to some one who just turned 50 is like spraying gasoline on a fire. True, most equity markets have delivered zilch for the past decade, but honestly, is that really the biggest reason investors should be disgusted? Isn't part of the problem that even though there were five positive years and five negative years during the past ten years, that quite often investors (not you) panicked and sold at the bottoms and crowded in at the tops?
Remember January 2000 when everyone was a technology investor and January 2003 when everyone abandoned the market as it took off to become real estate speculators? Remember 2007 when the sub-prime loan market collapsed and real estate speculators lost their fortunes? Remember March 2009 when the market looked like it was going to zero only to rise approximately 86% over the next 12 ½ months?
If losing money in the market wasn’t bad enough, remember when speculators drove the price of oil to $145 a barrel and some of your smarter friends bragged about "locking in" at $4.70 for their season's oil deliveries? Are those same friends now telling you that they just bought gold because it's the "only" investment worth having at this point? Instead of listening to naysayers predict future doom, let's spend some time looking at the big picture and see if we can understand where we are today and where we might be going.
First a quick review of the recent equity markets:
- November 2007 through March 2009 - very bad.
- March 2009 through May 2010 - very good.
- May 2010 through June 2010 - Market drops approximately 16% as economic growth slows. Treasuries rise and interest rates fall.
- July 2010 - Equity markets recover 8%.
Today, August 5, 2010, let's look at four key questions:
- Double dip or pause in recovery? Recent post-recession recoveries in the U.S. have taken longer, primarily due to the shift from manufacturing to service jobs over the past 50 years. Remember the Bush "jobless recovery"? In my opinion, the recovery will be slow and painful like the last one. The recovery will be in full swing when corporations either spend or distribute their profits. Hiring would speed things.
- Lost decade or even 15 years? Lost only if you allow uncertainty to control your life. While your retirement may be postponed, your current life need not be on hold. Take that from someone reaching an age milestone. As for the question, most people forget that the 80's and 90's were two of the best investing decades in history and this ten-year period may be the hangover. I would not be surprised if equity markets trades sideways for another two years.
- Is gold the answer? Actually gold already seems to have lost its glitter. After hitting $1,200 per ounce, gold has lost traction. If traders realize that gold is unable to break through to a higher price, look out below! In the long run, gold appears to be a reasonable investment in a diversified portfolio.
- Bonds, Bonds, but more Bonds? Where are all the geniuses who two years ago made fun of the U.S. dollar as the EURO hit $1.60? If our currency is so weak, why do investors all over the world gobble them up every time there's trouble? Unfortunately, investors have left bonds with nowhere to go but down as rates have hit near rock bottom. Personally, I do not subscribe to the theory that high inflation will cause rates to skyrocket. Instead, inflation will be the result of much lower unemployment, much higher consumer confidence and a rebound in real estate prices. If not, higher rates will result from uncontrolled government spending leading to a far weaker dollar.
Final note: For those politically motivated types out there harping on the democrats to stop spending, I'll remind you that in the absence of consumer and corporate spending the government is providing the fuel to keep this economy afloat. I hope that as our citizens return to work, start spending and paying taxes that our corporations will spend on technology to stay competitive, and our government will reduce spending and entitlements as more taxes are collected. This should lead to a balanced budget as it did in the mid 90's. Sounds great doesn't it? Part optimism, part turning 50. Things are not great for everyone but it's still a great country. Try to be happy until the markets return your lost savings.
The information contained herein is solely the opinion of the author and not guaranteed as to the completeness or accuracy provided. Please consult your advisors before making any investment or financial decisions.