Road to Retirement: Understanding the long run


With financial markets falling this year and investors getting nervous about when a recovery will arrive, you often hear investors say, “just stay the course because, in the long run, markets recover.” That has been true historically and there is good reason to believe it will remain true. Basically, given enough time, financial markets recover. But how much time is enough time?

All we can really do is look at history to see how markets have done in the past. That will give us a rough estimate of what we might experience in the future. And of course, markets can exceed whatever parameters they set in the past. It’s not as if the past shows the limits of market volatility, just the rough range of what you might reasonably expect. It can always be better or worse than that.

Charlie Farrell

Photograph by Ellen Jaskol

Charlie Farrell

These days, when I hear economists and market strategists talk about the “long term,” they often discuss it in terms of either several months or a few years. You might hear someone say, “six to 12 months from now the market should bottom,” or “within a year or two, markets should recover.” And because we mostly hear economists and strategists talk in these timeframes, many investors likely think that a potential recovery cycle will happen sometime between six months from now to a couple of years. Again, that’s reasonable because that’s when most recovery cycles do occur. But the long term can be longer than that, and you should know the numbers.

In the U.S., we have had a number of difficult market cycles where stocks took more than a few months to a few years to recover. Since 1926, we’ve had 12 calendar year cycles where stocks had a negative total return for five years. We’ve also had four calendar year cycles where stocks had negative total returns for 10 years. One of those cycles ended in 2009, so it’s not ancient history.

We also have examples of other developed stock markets that have stagnated for longer periods. The classic example is Japan. Its stock market peaked in the late 1980s and hasn’t seen those peak values since then. In Europe, they have a stock index called the Stoxx 600, which is similar to our S&P 500. Since the year 2000, it’s had less than a 1% annualized price return.

These are modern stock markets that have sophisticated investors and sophisticated regulators overseeing them. But their economies and markets got stuck in a cycle of low productivity, low growth, and excessive central banker and government intervention. Despite everyone’s good intentions, things haven’t worked very well.

I have no idea if we’ll go down this type of path in the U.S., but there are factors converging that make something like a long stagnation more likely. Consider that from 2000 through 2019, the total annualized return from U.S. stocks was just a little more than 6%. That’s one of the weakest 20-year cycles in history. And it came after 12 years of massive support from the Federal Reserve that many believe served to pump up financial market values. If you remove that support, the future looks a lot more uncertain.

When markets get into a stagnation funk, they usually don’t go down and stay there. Often, the cycles have been comprised of big rallies and declines, but when you net it all out, things didn’t move much. By the time you realize that what you experienced was a longer stagnation, there likely isn’t much you can do about it.


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