Changing Perceptions of Equities

As the 2000-2002 bear market stops weighing on 10-year returns, investors are likely to warm up again to stocks.

It is a sad fact of financial life, and one well documented, that investors often chase performance. They give up on disappointing asset classes, selling out only after taking substantial losses, in order to buy into more recent winners, too often only after those winners have made a good part of their ultimate gains. It is this well-established historical pattern that points to a coming enthusiasm about equities.

For quite some time now, investors have turned away from stocks. Despite periods of strength, two powerful bear markets, one in the opening years of this century and the other between 2007 and 2009, marred the long-term average performance figures of U.S. equities. Since so many investors draw their perceptions of future possibilities from historical performance calculations, the disappointing returns have raised many doubts about the role of equities in fundamental asset allocations.

As equity gains have built, this picture has begun to change. Since the market low of March 2009, the S&P 500 index has risen more than 120%. In just the last 12 months, it has risen almost 25%. More important, perhaps, even as the 10-year averages included these gains, they have begun to exclude the great losses of 2000-2002. As of the third quarter this year, the calculation of the 10-year average return has ceased to include the S&P 500’s nearly 25% losses between June and September of 2002. Accordingly, in just the last few months, the 10-year average return for the S&P 500 has risen from a mere 2.9% a year to over 8%, a long-term return that even recent investment discussion dismissed as an impossible relic of a false past.

Of course the great losses of 2000-2002 will remain in the record. But analytical conventions will greatly mute their effect. Investors actually seldom look back that far. Custom accounts only for one-year, three-year, five-year and 10-year performance. If there is any reference to a more distant past, the calculations look at 20- and 30-year blocks of time. On this basis, the powerful gains of the 1990s and 1980s will more than swamp the effects of that ugly period at the start of this century. Looking back over 20 years from the present, for instance, the average annual return on the S&P equals 8.6%. Over 30 years, it equals 11.6%. It is these figures, but especially the most recent 10-year average, that will alter formal analytics and inform investors’ perceptions, carefully calculated or derived intuitively.

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