Catching Up to the Averages

On a decade-by-decade basis, the S&P 500 is far behind its historical pace, but we expect some improvement

By Joseph Lisanti

For the 10 years ended 1999, the S&P 500 advanced more than 315%. But from the end of 1999 through last year, the "500" tumbled more than 40%. Even though 2003 appears likely to end with a gain, stock investors could well experience a below-average decade.

In terms of performance, the 1990s were the best decade in modern stock market history. On average, the S&P 500 gained 16.13% a year during the boom period.

Contrast that with what investors have seen since 2000. The average annual loss for the first three complete years of this decade has been 15.52%. Standard & Poor's estimates that the "500" will end 2003 at 1,085 for a gain of 23.32%. If the market hits that target, the average annual loss for four years would still be 5.81%.

Could this turn out to be the worst decade for stocks in the history of the S&P 500? That infamous record currently is held by the 1930s, when stocks advanced a meager 0.04% a year.

Assuming yearend 2003 at 1,085, the "500" would have to gain 3.94%, on average, for the remaining six years of the decade to match the performance of the 1930s. We think that the market is likely to do significantly better and that the Depression-era record for worst decade will probably stand.

The 1970s saw only a 3.2% annual gain in stocks. To simply match that performance, the market will have to rise 9.2% annually for the final six years of this decade if the index closes at 1,085 this year.

Although that's possible, it is less probable, given our projections for modest GDP growth and inflation over the next several years. The upshot is that everyone, especially baby boomers set to begin retiring soon, will have to save more. Alternative investment choices in bonds and cash equivalents look unappealing. We continue to recommend keeping 65% of your investment nest egg in stocks.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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