BlueCreek Investment Partners

• Home
• About BlueCreek
• Services
• Client Tools
  • My Streetscape
  • Financeware
• Contact Us

Fourth Quarter Commentary: Goodbye and Good Riddance to the Lost Decade

Think back, if you will, to the waning days of 1999. The decade of the ‘90’s had been a good one for investors, but abject fear gripped nearly everyone as we approached the New Millennium. Remember Y2K? Lazy computer programmers had neglected to encode software that would accommodate our entry into the 21st Century. Experts were predicting dire consequences from this computer glitch—the global financial system would seize up, shortages of food and water would ensue and airplanes would literally fall from the sky (seriously). The vast majority of the public bought in to some degree and anticipated the worst. You know the rest of the story—New Year’s went off without a hitch and our worst fears never materialized. We could welcome the new century with eager anticipation.

Boy, were we wrong! Perhaps the fear-mongers got it wrong about Y2K, but the decade turned out to be one all investors would like to forget. We should have feared 2000, 2001, 2002…..What is now commonly referred to as the Lost Decade resulted in the worst returns for investors in recorded history. One dollar invested in the S&P 500 on December 31, 1999 would have been worth $0.90 on December 31, 2009. The total return for the S&P 500, including dividends, for the entire decade was -0.95%.

A timeline of the first decade of the twenty-first century is punctuated by a litany of disasters that could simply not have been imagined. From the bursting of technology bubble and the horrendous terrorist attacks of September 11 early in the decade to the sub prime crisis and subsequent meltdown of our financial system that ushered in the Great Recession, it was like being unable to awaken from a bad dream. One catastrophe seemed to follow another, with periods of fear and greed characterizing the investing landscape.

As I discussed in the last market commentary, things have certainly improved since the darkest days of early 2009, but our national mood has not significantly brightened. Indeed, even with stocks posting a strong performance for the year, net outflows from equity mutual funds continue to increase. In fact, investors continue to move money out of stocks and into money market or bond funds.

I attribute this downcast attitude of the American public to the “hangover” we still seem to be experiencing from the Lost Decade. Behavioral psychologists have discovered that human beings tend to extrapolate our most recent experiences far out into the future. In other words, if we have recently been through a particularly difficult period in our lives, we feel that things will never get better and project our negative attitude into the future. And vice versa. I believe this phenomenon explains the black cloud that seems to be hovering over our nation’s collective psyche.

There is, however, reason to be optimistic about our country and our economy. First of all, the S&P 500 has never suffered back-to-back losses in calendar decades. It is hard to imagine that the next ten years will look anything like the last. Even the decade of the 1930’s showed a small positive return for stocks. Let us hope and pray that there is some principle or law of natural order that precludes a repeat performance of the last decade!

Secondly, as I touched on in the last letter, market valuation remains reasonable. With earnings estimates for the first year of the new decade ranging from $77-$80, the S&P500 is currently trading at a multiple of around 14x. Historically, fair value of the index is over 16x.

There are numerous market and economic statistics that show positive momentum, but there are larger forces at work, in my opinion, that bode well for the future. While many have claimed that capitalism failed in the latter stages of the last decade, I vehemently disagree. Policy-makers and corporate leaders might have made poor decisions that literally brought our system to its knees—but it did not fail. Weaker systems almost certainly would have failed, but ours did not. I remain a staunch believer in the capitalist system and the benefits it provides the American people.

The difficulties we have endured can actually make our system stronger. I believe the Great Recession can have a cleansing effect, washing away much of the hubris and excess we have witnessed. I sincerely believe many of the principles our system was built upon—prudence, trust, confidence, personal and fiscal conservatism, rational lending procedures and sensible policy-making—will be reintroduced and reemphasized in the coming years. Hopefully, we have learned from our mistakes and will move forward in a more thoughtful and intentional manner.

And finally, betting against America has never been an especially smart wager. The contrarian in me embraces the fact that nobody seems to be positive about our economic future—that makes me more bullish and a virtual certainty that better days lie ahead. Books have been written about the herd mentality and the “madness of crowds.” The thesis is that the crowds are generally wrong! I believe America will recover and prosper. I have faith that we can confidently say farewell to the Lost Decade and look forward to a prosperous and rewarding future.

As I did last quarter, I would like to leave you with quote that accurately sums up how I feel about our future. It is succinct and to the point:

“Any man who is a bear on the future of this country will go broke.”
J. P. Morgan