A Wealth of Common Sense: Could We See Another Lost Decade in the US Stock Market?
Markets are known as mean-reverting. In English, that simply means that if markets have some great up years that are above average, a few below-average years are likely to occur. That evens out returns relative to their historical norms.
Some are now calling for a lost decade in the stock market. That’s occurring even though we’re only down 23 percent from an all-time high set at the start of the year.
While it may be a bit early to make that judgment, we have seen two bear markets in under three years. That’s because the Covid crash, while short-lived at just 33 days, saw a 33.9 percent peak-to-trough decline in stocks.
And so far this century, stocks have already had six down years, of which four were down more than 10 percent. Meanwhile, markets have had six years with gains of 20 percent or more. That’s on track for a lower performance than in the 20th century.
With markets performing more poorly on average, and with more down years already on average, the likelihood of a lost decade sounds a bit higher.
It’s never out of the realm of possibility. But over the long-term, markets do recover from such long periods of underperformance.
However, with such a strong bearish outlook right now, future market performance could be better than expected as a result.