Happy anniversary? U.S. stocks mark 10 years of negative returns


Ten years ago the so-called dot-com bubble burst, marking the beginning of a “lost decade” for U.S. stocks as represented by the Wilshire 5000 stock index, according to an analysis from Wilshire Associates Inc.

From March 24, 2000, when the Wilshire 5000 reached its then-peak of 14,751.64, through March 23. 2010, when it closed at 12,287.44, the index produced an annualized -0.32% total return, including dividends reinvested. The cumulative total return was -3.11%.

“In those 10 years we've had two bear markets and two bull markets, if you count the current run-up,” said Bob Waid, managing director and head of Wilshire index research, who produced the analysis.

The previous “lost decade” was during the Great Depression, when the Standard & Poor's 500 stock index produced a total return of -0.37% annualized for the 10 years ended Feb. 28, 1941, said Mr. Waid, noting the Wilshire 5000 dates only to Dec. 31, 1970.

“There have been lots of comments during the recent market (meltdown) that everything went down; there was no place to make money. But even in the lost decade (of the 2000s) there were places to make money” in the publicly traded market, not just alternatives or other more complex asset classes.

For instance, while the Wilshire U.S. Large-Cap index, consisting of about 750 of the largest-cap stocks in the Wilshire 5000, produced an annualized total return of -0.78%, the Wilshire U.S. Small-Cap index, consisting of the next 1750 stocks by market value, produced an annualized total return of 4.13% during the recent lost decade.

The Wilshire U.S. Micro-Cap index, consisting of all the other stocks in the Wilshire 5000, also produced a positive annualized total return, 4.44%.

Further analysis showed value stocks outperformed growth stocks during the 10 years. The Wilshire U.S. Large-Cap Value index had an annualized total return of 2.79% and the Wilshire U.S. Small-Cap Value index, 9.47%. But the Wilshire U.S. Large-Cap Growth index and the Wilshire U.S. Small-Cap Growth index produced annualized total return for the decade of, respectively, -4.05% and -0.94%.

In addition, real estate performed even better than the U.S. stocks during the decade, despite the recent crash, Mr. Waid said. The Wilshire U.S. REIT index produced an annualized total return of 11.61%.

Among other asset classes, the Barclays Capital U.S. Aggregate Bond index had a 6.4% annualized total return during the decade; the Wilshire Global Total Stock Market index, 1.4%; and the Wilshire ex-U.S. Total Stock Market index, 3%.

“There are always periods in the market when some styles make money and some lose money,” Mr. Waid said. “That's called risk.”

In general, Mr. Waid said U.S. pension funds would have performed close to the index numbers.

In regards to chasing specific asset classes by overweighting them under expectations they will perform better, Mr. Waid said: “Dialing up risk isn't the answer. Higher risk doesn't produce higher return; it provides the opportunity for higher return.”

Overall, the analysis “shows diversification is good, across asset classes and within asset classes,” Mr. Waid said. The market results “reinforced” an allocation policy of a well-diversified, prudent pension plan, he added.

During the lost decade, the first bear market extended from March 24, 2000, to Oct. 9, 2002, when the Wilshire 5000 reached a low for the period of 7,342.84. Then the first bull market of the lost decade ensued, lasting exactly five years; the Wilshire 5000 rose to its all-time high of 15,806.69 on Oct. 9, 2007. That summit was followed by the second bear market of the decade, caused by the financial market meltdown; the Wilshire 5000 fell to its lowest point of the period, 6,858.43, on March 9, 2009. Since then, U.S. stocks have enjoyed the second bull market of the lost decade.

In the year ended March 23, all the Wilshire U.S. and total market indexes produced double-digit total returns, ranging from 46.05% for the Wilshire U.S. Large-Cap Value index to 115.78% for the Wilshire U.S. REIT index. The Barclays Capital Aggregate index had an 8.41% total return for the last year.