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Markets & Finance

Big Swings Are the Norm


By Jospeh Lisanti In a recent survey of wealthy individuals, more than 60% said they suffered double-digit percentage losses in their portfolios over the last three years. For some, that's a reason to sour on stocks. But a double-digit percentage change up or down, even in a single year, isn't unusual; it's the norm.

In 55 of the 74 years through 2002 (including each of the last eight years), the S&P 500 has posted a 10%-or-more change from the preceding year. What's unusual is the cluster. Never before have there been eight consecutive such years.

In the three years of declines from 2000 through 2002, the smallest drop was 10.1%. It was the first three-year decline since the 1939-1941 period, when one of the annual drops was less than 10%.

The only time stocks posted major declines for a longer period was in the Depression. From 1929 through 1932, stocks fell more than 10% annually, including a 47% plunge in 1931.

Although the series of double-digit percentage gains from 1995 through 1999 represents the longest run of such advances in modern history, it's the declines that upset people. They contribute to a rise in the "equity risk premium." That's what experts call the additional gain buyers expect when they purchase an asset class that is riskier than a government bond held to maturity.

In the immediate future, it might be difficult to achieve that extra gain from capital appreciation. S&P chief economist David Wyss expects the economy to grow about 3.5% annually, on average, over the next three to five years with inflation at about 2.5%. Wyss projects stock market gains of only about 7% yearly over that period because equities can't significantly outpace nominal economic growth, especially when interest rates are likely to rise.

We expect more companies to raise their dividends as a way to entice new shareholders and maintain existing ones in a period of expected weak market gains. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook


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