After A Crappy Decade, Stocks Always Do Great, Right? Wrong


There’s a new refrain that a lot of folks keep repeating these days: When stocks do as badly as they have over the past decade, they usually do great over the following decade. Sadly, like a lot of stock market refrains, it’s not really true.

Merrill’s Richard Bernstein, one of the best myth-busters in the industry, ran the numbers. The truth is that stocks usually do OK in the decade following a crappy decade, but not necessarily great.  Bernstein:

  • The return on the S&P 500 for the past 10 years (as of November month-end) was negative for the first time since February 1941, and was the worst 10-year return since August 1940.
  • The latest 10-year S&P 500 return was the 23rd worst of the 876 rolling 10-year periods first ending in December 1935 (i.e., in the worst 3% of returns).
  • Perhaps contrary to popular belief, the table below highlights that 10-year returns subsequent to periods of negative 10-year returns were actually somewhat mediocre.  10-year returns were above average (i.e, greater than 214% or roughly 12.1% per year) subsequent to only 5 of the 30 instances of 10-year returns being negative.

The good news is that “not great” is not the same thing as “bad.”  The worst 10-year return in Bernstein’s chart–which includes 30 years in which the prior 10-year-return was negative–was up more than 100%.  And given how awful the return of the past 10 years has been, a lot of folks would settle for that.