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Lost in our fixation on the plunging stock market is a momentous anniversary: The 20th anniversary of the S&P 500’s peak at the top of the internet bubble.
It’s worth pulling back from a tick-by-tick focus on the market’s extraordinary volatility and take the long view: Returns over the past 20 years. They are a sobering reminder that stocks don’t always provide superior long-term returns.
The accompanying chart, above, provides the grim statistics. Since March 24, 2000, when the S&P 500 Index SPX, -2.93% hit its bubble peak, it has produced a dividend-adjusted return of 4% annualized. That’s only about double the Consumer Price Index’s 2.1% annualized return over the same period.
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Furthermore, stocks markedly lagged the 5% annualized return of intermediate-term Treasuries and the 7.4% of long-term Treasuries TMUBMUSD10Y, +3.10%.
The Nasdaq Composite Index COMP, -0.27% performed even worse than the S&P 500. The dividend-adjusted Nasdaq 100 Index, for example, only held its own relative to inflation. International stocks did poorly too.
The No. 1 asset class
Gold GC00, +4.10% was the asset class that performed best, producing an 8.8% annualized return over the past 20 years.
Are you surprised by stocks’ inferior return? You shouldn’t be, for two reasons.
First, the past two decades are hardly the only 20-year period in which stocks lagged behind bonds. In fact, according to Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University, there have been several such periods in U.S. history. The reason few of us have been aware of this is that most historical databases extend back to only the mid-1920s. Prior to that, bonds performed far better relative to stocks.
In fact, McQuarrie views the decades after WWII as the exception rather than the rule. During those decades stocks far outperformed bonds. If you focus on all other decades in U.S. history, stocks’ and bonds’ returns were largely similar.
CAPE ratio
The second reason why you shouldn’t be surprised by stocks lagging bonds over the past 20 years: Stocks in March 2000 were more overvalued than at any other time in U.S. history. Nowhere was this more obvious than in the heights to which the Cyclically Adjusted Price Earnings (CAPE) ratio soared during the internet bubble. This is the ratio made famous by Yale University finance professor (and Nobel laureate) Robert Shiller.
The CAPE has been roundly criticized, especially until the bear market crash this month. But it needs to be acknowledged that, from the perspective of the past 20 years, the CAPE acquitted itself. The ratio hit a high of 44.2 at the top of the internet bubble, more than double its long-term average of 17.
Though the CAPE at this past February’s market top wasn’t as inflated as it was at the top of the internet bubble, it was well above average at 31. Since then it has fallen in lockstep with the market, and stands currently at 20.9 — essentially equal to its average over the past 50 years.
So the good news as we “celebrate” this week’s 20-year anniversary is that stocks’ long-term outlook is now markedly better than it was at the top of the internet bubble.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
