With less than 8 trading days remaining in 2009, we're pretty much sitting on our gains with our fingers crossed. About the only thing that could ruin our year at this point is a terrorist attack on the Rockefeller Center Christmas Tree in New York City. Between al-Qaeda and Hezbollah, that's a fear we will never forget.
In our September letter, we noted that the current decade was on track to be the worst or second worst for stocks in the 140 years we have valid data. Updating our chart through today, we see that the current decade, in net price appreciation and net of dividends, has pulled ahead of the 1930's.
That's cold comfort considering that a dollar invested in the S&P 500 January 1st 2000 is currently worth 91 cents - only the second decade of negative returns in the last fourteen. The same dollar invested in the S&P 500 on January 1st, 1980 was worth $3.27 December 31st, 1989, $13.60 at the end of 1999, and even now is worth $12.38.
Why were the 1980's and 90's such great decades for investors and the current decade so crummy? Probably the single biggest factor was the long term decline in interest rates from the 1984 peak to the lows of 1998. The ten year treasury yield fell from 13.8% to 4.4%, a post war low not touched until the "flight to safety trade" of last winter, which dropped yields to 2.2%. As risk free yields decline, price/earnings ratios of riskier assets like stocks can expand, which drives stock price appreciation faster than mere gains in earnings.