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RECOVERING FROM A LOST DECADE
by   Mark Wade  

The period from 2001 to now has been the worst era for stock investing that most of us have seen. The bulk of the damage erupted with the 2008 collapse of Bear Stearns and Lehman Brothers, followed by the plunge of the stock market in March 2009, but the truth is that even before then, the economy had showed very little strength. Ever since the horrific attacks of September 11, 2001, the markets have mostly been running sideways.

On September 10, 2001, the S&P 500 closed at 1,092. Many investors have forgotten that we had several years of mediocre growth after that; following the terrorist attacks, it took two full years just to ascend to that level again. The index peaked at 1565 on October 9, 2007, then began to slip again with the onset of the recession. As of September 10, 2011, the S&P was all the way back down to 1154. It was a decade of almost no growth.

What happened? We had two severe downturns in the space of that decade, bridged by a recovery that wasnít especially strong by bull-market standards. From 2001 to the financial-sector collapse in 2007, the S&P 500 returned around 7 percent per year Ė solid enough, but a long way from the double-digit returns investors became accustomed to in the 1990s. In the entire decade, the only year in which GDP growth reached 4 percent was 2004, when it was at 4.4 percent; by contrast, the economy grew at more than 4 percent for five out of the seven years from 1994 to 2000.

Combine severe economic shocks with a low-growth environment, and you get a decade of very little market growth. The question then becomes, what needs to happen to get the markets moving again?

There are still serious trouble spots in the economy, beginning with an unemployment rate still higher than 9 percent. Not only does that cripple the purchasing power of those out of work, but it inhibits people who are concerned about losing their jobs from spending freely. Consumer spending makes up 70 percent of our economy, so when people cut back, it can have a huge effect on our financial markets. Here in New Jersey, median household income dropped by 2.5 percent in 2010; that needs to turn around fo our stateís economy to grow.

Housing remains a serious concern as well. The market in New Jersey is taking an extra-long time to reach recovery in part because we have the longest average foreclosure process in the nation, at more than two and a half years. Since the number of default notices was still rising in the state as of the third quarter of 2011, we could be a long time digging out from under the housing mess.

Without some renewed strength in either of those areas, the conditions of the lost decade could continue. Itís not surprising that GDP forecasts for the immediate future are still weak. Goldman Sachs has predicted a feeble 1.7 GDP growth rate for the United States in 2012, down from its earlier forecast of 2 percent. While that would keep us out of a double-dip recession, itís still weak by historic norms.

How does an investor find success in such a landscape? Back in the late 1990s, when the stock market was roaring, the pundits said that the safe and easy choice was to put your money in an S&P 500 index fund, and let the rising tide lift you as well. But a dollar invested in the S&P 500 in 2000 was worth only 91 cents ten years later. That hands-off strategy is no longer viable.

There are still winners in this market. But now it takes ever-more hard work and expertise to find them. Yes, the S&P 500 has been beaten down in 2011 Ė but five out of its ten sectors have positive returns on the year, as of mid-October. Of the 25 largest companies in the index, 12 have lost value on the year, but 13 have gained value. The key is to be able to differentiate between the two.

Thereís still money to be made if you do your due diligence. Thatís one reason we choose to rely on actively managed funds, which go beyond simple index investing to identify only the most promising investments. It took careful planning to stay in track to meet your financial goals in the last decade, and the future could see much of the same. Rest assured that we here at Echelon Wealth Strategies will work as hard as we can to help you meet your financial goals.

 



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