November 15, 2022

This Decade Will Be a Downer for the Stock Market: Heard That One Before?

Historically, bad news and painful slumps like today’s inspire blah predictions. Funny thing how wrong they’ve been.

Reported by Larry Light

Art by Haley Jiang

Here we are again in a bear market, at the start of a new decade. Amid such downdrafts—Monday’s decline snapped another brief winning streak—negative forecasts flourish. With a look back at the previous decade’s long rally, various sages now forlornly predict that the coming decade will be lucky to manage growth in the low single digits.

Boy, that sounds familiar.

The 1980s market surge sputtered out amid too much debt and talk of enervating tomorrows. The 1990s, though, turned out to be a time of enormous tech adoption throughout the economy, and stocks thrived—until the era’s excesses, namely profit-free dot-coms, tanked equities. Then stocks recovered in the aughts. And so forth. From thence, the comeback cycle repeated itself. Each time, innovation sparkplugged a fresh market advance.

Will the pattern of wreckage and redemption keep going, and will the market enjoy another Roaring Twenties? Or at least do better than mediocre low single digits?

“If you define low single digits as 5% or less, I would say the odds of that happening are relatively low,” said Bob Jacksha, CIO of the New Mexico Educational Retirement Board, which logged a healthy 8.4% annual return for the five years through mid-2022. “I think we will do better than that.”

“Every time there’s a pullback or a recession, I always hear a chorus of people saying to get ready for low single digits,” said Doug Foreman, CIO of investment firm Kayne Anderson Rudnick. What they overlook, he noted, is that the drawdowns create bargains that set up “above-average returns.”

The Stuck Syndrome

At the moment, numerous well-known savants are unexcited by what lies ahead. Many of their qualms can be summed up by Larry Summers, the Harvard economist and former U.S. Treasury secretary. He has long warned of what he calls “secular stagnation”—a scarcity of innovation that leads to sluggish economic growth. The sec-stag take shrugs off the potential revolutionary impact of cloud computing, big data, artificial intelligence, biotechnology and a whole host of leading-edge developments moving onto the economic stage.

For sure, the downbeat outlooks are hard to ignore. Billionaire investor Stanley Druckenmiller recently said stock market returns could be in go-nowhere mode for the next decade. “There’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ’66 to ’82 time period,” he said in an interview with Alex Karp, CEO of software and A.I. firm Palantir Technologies.

The world’s current panoply of woes often is trotted out to justify slow growth or decline: high inflation, tightening interest rates, war in Ukraine, the COVID-19 pandemic, etc. Seers who successfully foresaw past debacles are prominent in the we’re-stuck camp. Michael Burry, the former hedge fund operator who now runs his own money, presciently augured the housing debacle that led to the 2008-09 global financial crisis

He recently tweeted that a market crash is en route. Burry, who recently liquidated almost his entire equity portfolio, has said the worst for the economy is yet to come, and he emphasized the Federal Reserve’s gung-ho campaign to hike rates. “Winter’s coming,” he warned, invoking a catchphrase from the HBO series Game of Thrones, about bad times ahead.

Ray Dalio’s Bridgewater Associates warned earlier this year that we could be facing a “lost decade” for stock market investors. A student of geopolitics and international economics, he has written several books outlining a world of danger. Dalio sketched out in a LinkedIn post a scenario in which “the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”

Long bull runs have a way of stirring up expectations that winter is indeed coming. Reasoning: After much good market fortune, the sweet returns cannot possibly be replicated, let alone exceeded. Over the past 40 years, such exhortations arrive near the end or the start of a new decade, and big market slumps have come along to drive home the dour thesis.

Case in point: Three decades ago, The Great Reckoning, a book by investment newsletter writer James Dale Davidson and British financial commentator Lord William Reese-Mogg, outlined how the 1990s were going to disappoint investors who had thrived in the fast-growing 1980s. Their culprits: overburdened consumers, debt-laden governments, crashing real estate values, a wobbly Japanese economy and Muslim extremists.

The Comeback Kids

But as investment manager David John Marotta, president of Marotta Wealth Management in Charlottesville, Virginia, noted on his blog, the two authors and others like them reckoned without the tech explosion of the 1990s. During that decade, the S&P 500 expanded more than fourfold.

Sure enough, the dot-com bust in 2000 triggered more dire warnings of the decade ahead, and the market sagged anew. Then came the housing boom, which restored its fortunes, returning the S&P 500 to its pre-dot-bust level. Of course, the 2008-09 financial crisis killed off that comeback and resurrected more mordant takes on the future.

During the 2010s, however, the index almost tripled, amid low inflation and interest rates, plus more tech innovation. “We’ll always have cycles, so it’s best to be dynamic in asset allocation” and be ready for the next uptrend, said Matt Lloyd, chief investment strategist at Advisors Asset Management.

One salient counterargument to the doom school is made by the biggest stock bull in academia, Jeremy Siegel, an emeritus economics professor at the University of Pennsylvania’s Wharton School and author of Stocks for the Long Run. His key message: No matter what happens to the economy, you can’t lose with equities.

This classic tome, which has been updated continuously since its original 1994 publication (a new edition is just out), argues that equities are the best wealth builder in creation, despite periodic pratfalls—and have returned around 7% yearly on average, adjusted for inflation, since 1802.

In an interview with Knowledge Wharton, Siegel argued that “the long-term real rate of return from investing in stocks is remarkably durable.” The equity risk premium, what stocks return over risk-free Treasury bonds, holds up well over time, the economist declared. In fact, over the past 10 years, with some brief spikes and lulls, its average has hovered between 5.3% and 5.7%.

Powering this is good old innovation, maintained Michael Sansoterra, CIO at Silvant Capital Management. “The thinking after every major recession is, ‘Well, that’s it, then,’” he said. “I don’t worry about the long-term industriousness or creativity of the American people.”