On ‘Lost Decade’ Chatter, Remember the ‘New Roaring 20s’

Throughout this summer and fall, as stocks bounced around their year-to-date lows, a grim prediction has periodically flared: a lost decade for stocks. The US, some forecasters warn, is doomed to repeat Japan’s 1990s malaise. This isn’t a new warning—it flared in 2009 and 2010, illustrating how lost-decade sentiment tends to flourish during and just after bear markets. Actually, if you look back at the past several decades of financial writing and news coverage, you see decade-ahead forecasts tend mostly to reflect people’s feelings about the present or very recent past. To see this, look no further than what people were saying throughout mid-to-late 2020 and 2021.

We refer, of course, to calls for a new “Roaring 20s” as lockdowns ended and society unleashed several months of pent-up demand. It started with a simplistic historical parallel. As The Atlantic explained: “The Devastation of World War I and the 1918 flu pandemic was quickly followed by a manic flight into sociability. The Roaring Twenties saw a flowering of parties and concerts. The 1918 virus killed more people than the deadliest war humanity had hitherto experienced, but it did not reduce humanity’s determination to socialize.”^[i] It didn’t offer a stock market or economic forecast, but it pointed out the many ways human activity would surely keep humming as society learned to live with the virus. Other outlets were less circumspect, exploring the seemingly strong potential for the US economy to roar all decade long. Many cited the stock market’s swift bounce after early 2020’s lockdown-induced bear market and extrapolated it far forward. Party time!

Now, don’t get us wrong—that view wasn’t necessarily the central, mainstream one. But it was common enough—and a sign at the time of burgeoning optimism. Now, though, people seem largely to have memory holed it. No one talks about the new Roaring 20s anymore. Economies did reopen, and output did boom. There was huge catch-up growth. Global stocks more than doubled between the lockdown bear market’s end and December 2021. But just when it perhaps seemed like everything was on track, the ground shifted. Supply chain concerns, fears of inflation and Fed rate hikes perked. Rising oil prices in the run-up to and immediate aftermath of Russia’s Ukraine invasion fueled more dread, as did chatter over the war possibly spreading. Talk of recession mounted. As worries snowballed, the stock market downturn that began in early January became a full-fledged bear market. Rallies would spur some hope, but gloom soon returned as they proved to be false dawns. The good cheer that ruled in 2021 was gone, and deep pessimism settled in its place—giving rise to all this year’s lost-decade chatter.

We think this saga shows the futility of thinking in decade terms. Stocks don’t move in decade-long windows. Rather, bull and bear markets’ lengths run the gamut. The 1990s and 2010s may have been decade-long bull markets, but those are outliers in history. The 1980s were the third-best decade on record for the S&P 500, with a total return of 400.3%.^[ii] It happened to include two bear markets, including the grueling slog that ran from late November 1980 through mid-August 1982. The 1950s—the S&P 500’s best decade—had a year-plus-long bear market smack in the middle. Meanwhile, the only decade since the 1930s with a negative total return, the 2000s, actually had a positive run from October 2002 – October 2007. It just happened to be a relatively small bull market bookended by two of the longest bear markets on record—the Tech bubble’s implosion at the beginning and the Global Financial Crisis at the end. The other modern decade everyone remembers as awful, the 1970s, actually had a 75.3% return as the bull market years outweighed the bear market that lingered in 1970’s first half and the downturn of January 1973 – October 1974.^[iii]

Maybe seven years from now, as the 2020s are winding down, we will be looking back at a decade with big returns that seemingly justifies all that Roaring 20s hype after all. But it won’t have been a straight line there—2022 assures that. Similarly, if the decade’s tally happens to be flattish in the end, that flattishness will probably be the net result of many ups and downs along the way. To think in decade terms is to erase this cyclicality and forget that whatever stocks do cumulatively over some long period of arbitrary length, there will almost surely be opportunities within that window. Secondarily, it is to forget that even in very good long-term stretches, there are probably periods of scary market declines that will tempt you to error. Thinking in long-term cycles only makes investing look a heck of a lot easier than it is and pays short shrift to the myriad temptations that volatility brings.

We always encourage people to think long term and remember that, over time, stocks have delivered high long-term returns, helpful for many who seek equity-like growth to finance their goals and objectives. But we also urge everyone to have realistic expectations along the way. There will be good years and bad. Sometimes those will even out to wonderful decades, sometimes middling decades and sometimes sad ones. Crucially, it is probably safe to say no one will identify these in advance. At the beginning of the aforementioned 2000s, everyone was predicting the “new economy” where perma-boom replaced boom-and-bust. Ten years later, lost-decade fears preceded the longest-ever bull market in the 2010s. All we have done in the past year and a half, with the shift from Roaring 20s to lost decade talk, is compress this sentiment cycle, which really just reflects how short the March 2020 – January 2022 bull market was.

So any time you hear a projection about the next decade, be it good or bad, see it for what it is: a snapshot of investor sentiment, which stems from whatever the market and economy have just done. That is inherently backward-looking. Past performance simply doesn’t predict future returns.