Michael E. Schroer, CFA MANAGING PARTNER & CHIEF INVESTMENT OFFICER | RENAISSANCE INVESTMENT MANAGEMENT Highlights The stock market weakness thus far this year has triggered memories of the so-called “Lost Decade for Stocks,” and some predictions that another lost decade is ahead of us. The term “Lost Decade for Stocks” refers to the ten-year period from 12/31/1999 through 12/31/2009, when the S&P 500® generated an annualized total return of -0.9% over the period. This was only the second time that the market actually had a negative total return over a decade period. The other period was the Great Depression decade of the 1930s. Growth of $1 Invested From 12/31/1999 – 12/31/2009 1 Annualized return Sources: Renaissance Research, FactSet The U.S. stock market has been top-heavy with few large companies, primarily in tech, driving returns for several years. Now may be an especially good time to diversify away from concentrated indices and, instead, consider high quality, reasonably priced growth opportunities. The 1999-2009 period was marked by the collapse of the late dot-com bubble, the 9/11 terrorist attacks, the Iraq and Afghanistan wars, as well as two recessions, the deepest being the 2008-2009 Financial Crisis. Importantly, the trailing P/E multiple of the S&P 500 was over 29x at the end of 1999 (compared with only 19x today). With all of those headwinds, it isn’t surprising the S&P 500 struggled to post any gain. However, a deeper look at the stock market over that period provides a better perspective on its rate of return. For example, the S&P 500 calculated on an equal-weighted basis posted an annualized total return of 5.1% over the period, 6.0% higher than the cap-weighted version of the Index. While a dollar invested in the cap-weighted S&P 500 at the end of 1999 declined to 91 cents by the end of 2009, a dollar invested in the equal-weighted index would have grown to $1.64 (+64.0%, unannualized). Total Returns: 12/31/1999 through 12/31/2009 Past performance is not indicative of future results. Performance for periods of one year or less is not annualized. All returns are shown in U.S. dollars. Sources: Renaissance Research, FactSet The stocks in each version of the index are identical, but the equal-weighted approach would have avoided some of the disappointing performance posted by very large cap stocks over the decade and invested more in medium-sized stocks in the S&P 500 Index that experienced better growth. Similarly, investing in mid cap or small cap stocks would have generated good total returns as well, resulting in end-of-period values twice the value of investing in the S&P 500. A “lost decade,” while historically rare and unlikely, is still very concerning to contemplate. However, diversification across various market capitalization ranges of U.S. stocks may provide additional possibilities for returns above that of simply the cap-weighted S&P 500. LEARN MORE ABOUT DIVERSIFICATION
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