By Nikolaj Gammeltoft
Jan. 1 (Bloomberg) -- U.S. stocks fell this week, limiting an advance that sent the Standard & Poor’s 500 Index to its biggest annual increase in six years. The 2009 rally failed to rescue investors from the worst return for any decade.
Ford Motor Co. dropped 1.3 percent for the week, bringing its decade loss to 80 percent after the credit crisis threatened to push the carmaker into bankruptcy last year. Apple Computer Inc., the iPhone maker that beat analysts’ profit estimates for 19 straight quarters, climbed 0.8 percent, extending a 720 percent advance over the last 10 years.
This past year’s rally wasn’t enough to restore money lost in two bear markets after the Internet bubble collapsed in 2000 and more than $1.7 trillion in global bank losses sent the index to a 38 percent decline in 2008. The S&P 500 posted an average decrease of 0.9 percent a year since 1999 including dividends, the first negative return for a decade since data began in 1927, according to S&P analyst Howard Silverblatt.
“This dispelled two myths,” said Robert Arnott, founder of Research Affiliates LLC, which oversees $47 billion in Newport Beach, California. “The notion that investment gains are easy, and the notion that stocks will win for the patient investor, no matter what we pay.”
The S&P 500 slipped 1 percent to 1,115.10 this week, paring its 2009 gain to 23 percent, the biggest advance since it climbed 26 percent in 2003. The Dow Jones Industrial Average fell 0.9 percent to 10,428.05, lowering the yearly increase to 19 percent.
Equities rebounded in March after investors paid an average 11.9 times earnings for S&P 500 companies, a 23-year low, according to data compiled by Yale University’s Robert Shiller. He adjusts valuations for inflation and uses a decade of profit to smooth out short-term fluctuations.
Since reaching a record 1,565.15 in October 2007, the S&P 500 has fallen 29 percent, erasing about $5.3 trillion of stock market value. The index’s 65 percent gain since March 9 cut the loss in half after the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession, according to data compiled by Bloomberg.
The price of the benchmark index for U.S. equities slid 24 percent over the last 10 years, a smaller loss than the 42 percent retreat suffered during the 1930s. Dividends brought the annualized return during the decade of the Great Depression to 1 percent, according to S&P data.
Investors who put $10,000 in stocks on Dec. 31, 1999, have $9,090 now, while the same amount in 10-year Treasury notes would have grown to about $18,000 following a 6.1 percent annualized return, according to data compiled by Bloomberg. A $10,000 investment in the Reuters/Jefferies CRB Index of 19 raw materials increased 3.3 percent a year to $13,803. Gold futures rose 14 percent a year, turning $10,000 into $37,852.
The average annualized return for U.S. equity mutual funds was 1.7 percent during the decade. Only one fund out of 3,833 gained in 2008: Forester Value Fund rose 0.4 percent that year, according to Chicago-based Morningstar Inc.
Hedge funds’ annualized return was about 6.3 percent since Dec. 31, 1999, according to Hedge Fund Research’s HFRI Fund Weighted Composite Index. The measure rose 19 percent in 2009 through Dec. 15.
“Those who benefited in the decade were short-term investors who were able to take advantage of the volatility in the stock market,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “That isn’t the signal authorities should give players in the market. You want them to think of it as a place where you can save for your retirement.”
JDS Uniphase Corp. fell the most among companies still in the S&P 500, plunging 99 percent. The ranking doesn’t include Lehman Brothers Holdings Inc., Bear Stearns Cos., Houston-based Enron Corp., Clinton, Mississippi-based WorldCom Inc. and 207 other stocks removed from the index since Dec. 31, 1999, according to data compiled by Silverblatt.
JDS, the maker of computer-networking equipment based in Milpitas, California, fell every year except 2003 after declines in the value of companies it bought caused a $56.1 billion loss in 2001. Phone and computer companies were the worst-performing industries in the S&P 500, losing 64 percent and 54 percent since the end of 1999. Cupertino, California-based Apple was an exception, surging to $210.73 from $25.70.
Citigroup, AIG Plunge
Banks and brokerages had the third-biggest drop of the 2000s, led by a 91 percent slump in Citigroup Inc. and a 98 percent tumble in American International Group Inc., both based in New York. Lenders were dragged down by $1.7 trillion of global bank losses and writedowns tied to property loans during the credit crisis that began with mortgage defaults and accelerated with the collapse of New York-based Lehman Brothers in 2008.
Ford also fell every year except in 2003 when the U.S. economy recovered from the first recession of the decade. The Dearborn, Michigan-based auto maker plunged as the American car industry lost market share, culminating with the government taking a 61 percent stake last year in Detroit-based General Motors Co., the biggest U.S. automaker.
Investors may experience more subpar returns, said John Bogle, who founded the Vanguard Group mutual fund company. Those counting on a recovery such as the rally that lifted stocks 18 percent a year in the 1980s will be disappointed, said Bogle, who created the $92 billion Vanguard 500 Index Fund in 1976.
“The 1990s was the golden decade for stocks, the 2000s was the tin decade and the next 10 years will be the bronze decade,” Bogle said. “Stocks will rise 7 to 9 percent over the next 10 years, below the historical norm but better than the last 10.”
The U.S. budget deficit reached a record of $1.4 trillion in 2009, pushed up by the cost of bank bailouts and benefits after 7.2 million jobs were lost since the recession started two years ago. The U.S. government’s total debt is now more than $12 trillion, according to the U.S. Treasury.
“We need to legitimize the recovery and move beyond the artificial government supports for the economy,” said John Lynch, who helps manage $155.5 billion as chief market analyst at Evergreen Investments in Charlotte, North Carolina. “We have to learn our lessons from the dot-com, credit and housing bubbles.”
‘Decade of Delusion’
Stocks rallied in 2009 after Federal Reserve Chairman Ben S. Bernanke held interest rates near zero and launched the biggest expansion of the central bank’s power in its 96-year history. Bernanke pumped money into the economy through the purchase of mortgage-backed debt and U.S. Treasuries and the government pledged more than $200 billion to bail out New York- based securities firm Bear Stearns Cos. and AIG.
Congress authorized the $700 billion Troubled Asset Relief Program to buy toxic assets from lenders including Citigroup and New York-based banks Goldman Sachs Group Inc. and JPMorgan Chase & Co. as the crisis escalated. The Treasury invested more than $200 billion of the money in financial institutions.
“It’s been a decade of delusion,” said Richard Tedlow, professor of business administration of Harvard Business School in Cambridge, Massachusetts. “In many ways, we’re worse off than the 1930s, we’ve created problems of moral hazard and we’re faced with an astounding public debt.”