MW Here's one reason investors should stick with stocks, despite warnings of a 'lost decade' ahead
By Joseph Adinolfi
As Deutsche Bank points out, stock-market returns over the past 25 years actually haven't been all that great.
Stocks have been on such a spectacular run lately. It's easy to forget that it wasn't always this way.
But on Tuesday, a team of strategists at Deutsche Bank delivered a dose of perspective to their clients when they published a report looking back at how the global economy - and global markets - have evolved over the past 25 years.
The quarter century beginning with the year 2000 has coincided with a massive accumulation of global debt, along with deteriorating demographic trends across the developed world, and parts of the emerging world as well. The onward march of globalization appears to have hit a wall, as growth in global trade as a percentage of global GDP appears to have stalled out.
If one were to travel back in time by 25 years, many of these developments might seem surprising.
For example, back in 2000, the U.S. Congressional Budget Office had anticipated that the federal government could pay off all of its outstanding debt by 2013, as the Deutsche Bank team pointed out.
But soon afterward, the U.S. debt-to-GDP ratio began a relentless advance, recently topping 100% for the first time since the aftermath of World War II.
But just as surprising for contemporary investors might be Deutsche Bank's analysis of how stocks have performed since Dec. 31, 1999.
The S&P 500's performance over that time is still colored by the dot-com crash, the 2008 financial crisis and the post-COVID-19 inflation shock of 2022.
Because of these periods of tumult, the past quarter-century has actually seen the second-weakest stretch of compounded annual returns out of nine such periods going back to 1800, according to Deutsche Bank. The only interval where stocks fared worse? The 25-year stretch between the dawn of the 20th century and 1924.
This should be a helpful reality check for investors. And a lesson for those on Wall Street calling for a "lost decade" for stocks ahead. Recently, strategists at Goldman Sachs Group and Vanguard Group have warned that annual returns for stocks in the coming years could be in the low single digits.
"So even though several equity bull markets in the 2000-2024 [quarter century] have made the asset class feel indestructible at times, the reality is that multiple sell-offs and crises have left the full-period returns relatively muted versus history," said Jim Reid, head of global economics and thematic research at Deutsche Bank, whose team authored the report.
Stocks haven't just fared poorly on an absolute basis. They have struggled relative to other asset classes as well, most notably gold. Investors would have actually been better off putting all of their money in the yellow metal in December 1999 and keeping it there.
Since then, the S&P 500 SPX has seen real annual compounded returns of 4.9%, compared with 6.8% for gold. This is unique among the nine quarter-century periods examined by Deutsche Bank.
Gold also has a slight edge on stocks in 2024. The SPDR Gold Shares ETF GLD has risen more than 25.4% year-to-date as of Tuesday afternoon, compared with a gain of 25.4% for the S&P 500, FactSet data show.
While stocks have managed to outperform bonds, the S&P 500 hadn't eclipsed the cumulative returns seen by Treasurys and corporate bonds until relatively recently.
Setting all of this aside, the Deutsche Bank team remains convinced that stocks are the best choice for investors with a long-term time horizon.
See: Wall Street is worried stocks might be on the cusp of a 'lost decade'
"It is true that some periods do see equity underperformance, but these don't tend to persist much beyond a decade," the Deutsche Bank team said.
But there's another reason investors should consider sticking with stocks, according to Deutsche Bank.
Not only have they reliably outperformed alternatives like bonds over the long term, but the unsustainably trajectory of global debt accumulation increases the likelihood of another inflationary spike as governments around the world attempt to inflate away the debt.
Periods of persistent inflation have in the past proven much kinder to stocks than bonds. Although both asset classes took a beating in 2022.
U.S. stocks were trading lower on Tuesday, as a post-election rally took a breather. The S&P 500 was down 0.3% in recent trade, while the Nasdaq Composite COMP was down 0.1%. The Dow Jones Industrial Average DJIA had fallen by 390 points, or 0.9%, at 43,902.
-Joseph Adinolfi
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(END) Dow Jones Newswires
November 12, 2024 15:55 ET (20:55 GMT)
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