Decade toughest yet for US investors

For investors in the United States stockmarket, the Noughties were worse than that.

Even adding in dividends, the S&P 500, the broadest measure of US equities, is down about 1 per cent since 2000, a terrible result given that inflation has reduced the value of those holdings further. Getting back to nought requires a Christmas miracle.

Share prices are locked on course for the worst decade ever. Ever. Not even the 1930s, the period of the Great Depression, was as bad for stocks.

Comb the records right back to the start of reliable measurement in the 1820s and nothing comes close. Yale University data shows that stocks fell at an average annual rate of 0.5 per cent over the Noughties, compared with 0.2 per cent in the 30s, the only other time the calendar shows a negative result.

The experts will point you to the calendar before anything else. We are measuring between two arbitrary points, they will say, with a dot.com bubble bursting right after the start of the decade and an all-out financial collapse at the decade's end. Overhyped dot.com stocks meant valuations were impossibly high when the new millennium dawned.

Market strategist Jeffrey Kleintop said: "Market cycles don't fall neatly into decades. We were optimistic at the start of the decade, we are pessimistic now. We did see earnings growth - of 23 per cent from the end of 1999 to the current quarter - and dividends provided returns of 15 per cent over the decade, so the main drag on returns this decade was valuation."

Donald Marron, a former member of the White House council of economic advisers and now visiting professor at Georgetown Public Policy Institute, said: "If you want to play the blame game, the first group to blame are the irrationally exuberant investors back in 1999, who pushed valuations to levels that set us up for a tough decade."

Investors largely decide whether to buy or sell stocks based on their price-earnings ratio, a measure of the stock price relative to the profits being generated for shareholders. So while the price side of the equation is crucial, so is the earnings side and too many of the profits conjured up over the decade turned out to be unsustainable.

"We fundamentally over-allocated resources to housing and the financial sector," Marron said. "We simply had too many mortgage bankers and repackagers running around and too many people building houses."

Strategists are debating other possible contributing factors to the dismal performance of equity markets. But there is remarkable consensus on one major cause: the economy was distorted by cheap credit. Low interest rates in the US, set by the Federal Reserve, and a wall of money loaned from booming emerging markets, inflated a bubble, it is now clear.

Economist Michele Gambera said the next decade held more promise. "We don't know what the next big thing will be, but if we have good infrastructure and a population that is educated in maths and computers, we will get there faster."

- INDEPENDENT