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In April of 2008 I started writing about the miserable stock markets we’ve experienced in this first decade of the 21st century, suggesting that things might even get worse.

They did, and then they got better in 2009, but not good enough to bring the decade into positive territory. We have just experienced the worst U.S stock market decade in the past 8 decades, starting in the 1930s.

In this end-of-year commentary, I examine the past year and the past decade, placing them into perspective relative to the long run history of our stock markets. I discuss both domestic and foreign stock markets.

The U.S. Stock Market

Stocks,Bonds and Bills

The U.S. stock market, as measured by the   S&P 500, earned 26.5% in 2009, rebounding from a 37% loss in 2008. This recovery was not enough to restore previous losses, however, so we’ve ended the decade with an average annualized loss on the S&P of 1% per year, well below the 84-year long term average return of 9.8% per year. By contrast, bond performance for the year (4%) and the decade (7.4%) was in line with historical averages (6.1%), as was inflation (2.8%). Completing the picture, we’re paying the government to use their mattress, with Treasury bills yielding 0.15% for 2009.

Of the eight calendar decades for which we have data (1930s, 1940s…), the 2000s were the worst performing, although they were not the worst 10-year period ever. The following chart shows the returns of the past eight calendar decades, as well as the best and worst 10-year periods ever. There have been worse times than the 2000s: the S&P lost 5% per year in the 10 years ending August 31, 1939(shown in the graph), and we just experienced the worst real (return net of inflation) 10-year loss in the period ending February 28, 2009 (not shown). Did you feel this February, 2009 loss? That decade brought real cumulative losses of 49%, or 6.5% per year.  No wonder we feel poorer. It’s been awful.

Ann S&P by decade

Delving deeper into the details, the next graph shows in red how the individual years of the 2000s fared historically. Also, shown in green are the individual years of the previous decade, which as you can see from the graph above was a very good decade. Years like 2008 have happened before, but fortunately not very often; 1931, 1937 and 1974 were the only other years with real losses in excess of 30%. Note also that only three of the past ten years – 2003, 2006 and now 2009 -- were reasonably good. By contrast, you can see how good the green colored 1990s were.

84 year return

Investors would have been better off in bonds or Treasury bills than in stocks.  Do you think the next decade will be better, or bring more of the same? Where can we invest and be safe? One place that would have helped in the past decade was foreign markets, which returned more than 6% per year, although they too suffered 2008 losses.

The ride to disappointment has been bumpy. First the bubble burst in the three years 2000-2002, and from there the stock market clawed its way back so that investors had earned an average 3.5% per year return for the decade-to-date as of October of 2007. We were back even with inflation for the decade-to-date. But then the next 16 months took all of that back, and more, with the S&P plummeting 55% from 11/1/07 through 2/28/09.

As painful as those 16 months were, we can still learn from this experience. This is the kind of period that serves to stress test those investments that are supposed to be good defensive plays, and to evaluate how well our professional investment managers have held up. We’ve made back some ground in 2009, but there are plenty of reasons to not be sanguine. In the following we review various market segments and strategies, to show what worked in the year 2009 and in the decade, and what did not.  What sectors, styles, and countries have performed best and worst? The bottom line: everything worked in 2009, and only growth stocks failed for the decade. The real questions of course are all about the future; an understanding of the past should help.