Networth: U.S. market will end its worst decade in history

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Barring a last-minute miracle, the broad U.S. stock market will end its worst decade in history this week, underperforming almost every other asset class including most foreign stock markets, U.S. bonds, gold, oil, other commodities and even real estate.

U.S. stocks rode through two bull markets and two bear markets and are likely to end the tumultuous decade slightly below where they started, with an average loss of roughly 1 percent per year.

Much has been written about this so-called lost decade for U.S. stocks, but I asked Ned Davis Research to calculate the performance of investment categories over the same period.

The big winners were gold, oil, other commodities and the countries that produce them. Had you invested in Brazil's stock market at the beginning of the decade, you would have earned close to 20 percent a year, the best return in the study.

It's important to remember that the decade began at a turning point in the global economy and investor psychology.

In January 2000, the technology-media-telecom bubble was nearing its peak. "Everybody was focused on clicks and eyeballs. Nobody wanted to own gold, iron ore, all that old-school stuff," says Gary Motyl, chief investment officer with Templeton Global Equity Group.

However, just months into the decade, technology began to collapse as investors concluded those stocks "were ridiculously overvalued and some of these companies wouldn't exist in a year or two," Motyl adds. Suddenly, "all this old-school stuff looked undervalued."

S&P equity strategist Alec Young explains that before 2002, demand for oil, steel and other commodities was so weak, and prices so low, that "there was a lot of underinvestment. It was too unprofitable to explore. That left the market ill prepared for a spike in demand" that started in 2003 when the economy recovered.

Growing demand from China and from institutional investors that began to add commodities to their portfolios sent prices skyrocketing.

That helped countries such as Australia (up 11.5 percent per year) and Brazil, which are big suppliers of metals and other raw materials, especially to China.

Brazil also benefited from increasing political and financial stability.

Crude oil prices rose nearly 12 percent per year on average during the decade, fueling the stock markets of energy-producing countries such as Russia (up 15 percent per year) and Norway (up 11 percent).

Other big winners included India (up almost 14 percent per year) and China (up 10 percent).

"The general feeling is that China is a growing power and the economic numbers have shown that. They've also had more companies going public," says Gregg Wolper, a senior analyst with Morningstar.

"India is often paired with China as a country that has a huge population and an increasing number of middle-class consumers," he adds. India also has software companies, such as Infosys and Wipro, that have emerged as world leaders.

Although it's not an industrial commodity, gold -- which started the decade near its multi-decade low -- also soared, up 15 percent per year on average.

"People were looking for an alternative to the U.S. dollar and paper money in general, something to hedge themselves should inflation return," Motyl says.

Another major trend of the decade was the weakening dollar, says Michael Cuggino, president of the Permanent Portfolios.

Although it started off strong, it fell against most major currencies for most of the decade. For U.S. investors, the falling dollar produced currency gains that enhanced the returns of overseas investments.

It also contributed to the rise in oil, gold and other assets that are priced in U.S. dollars. "If the dollar is weakening, it takes more dollars to buy them," Cuggino says.

Cuggino says another theme of the decade was falling interest rates, which boosted the value of bonds and other fixed-income investments such as real estate investment trusts.

Thanks to strong gains early in the decade, REITs -- which invest mainly in commercial and multi-family housing -- returned nearly 10 percent a year.

Even home prices managed to eke out a small increase for the decade. Real estate "started from a pretty low base. Then you had a massive run-up. Even though you had a massive decline in the last two years," it wasn't enough to wipe out all the gains, Motyl says.

Only four stock markets fared worse than the United States last year, based on the S&P 500 -- Ireland, Finland, Greece and Japan.

Could the U.S. market also suffer two back-to-back losing decades? Analysts say it's possible, but not likely.

This is the first decade the S&P 500 will post a negative total return, including dividends. In the 1930s, the index itself was down but dividends pushed it into positive territory.

In the 1990s, the index was up a staggering 18.2 percent a year. If you combine the past 20 years, it gained 8.2 percent a year, a little below the historical average of 9.9 percent.

"It's hard to look out over a decade," Young says. "But I would be surprised if the coming decade is not a heck of a lot better" than this one.

(E-mail Kathleen Pender at kpender(at)sfchronicle.com. For more stories visit scrippsnews.com)

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