Merryn Somerset Webb doubts that markets will go on rising — and advises us how not to get poorer in 2010
Back in early 2007, an interviewer challenged my stance on the housing market. She pointed out that I had been bearish on the property market for several years but that the market did not seem much interested in my opinion. It wasn’t crashing. And that, she said, suggested that it never would.
This is a pretty dimwitted argument. But it is much used when an asset class is rising for reasons connected to something other than its real value — its very rising is somehow used to justify its rise. Property market-watchers will remember that pre-crash, the most the housing bulls would accept was that there might be a ‘period of consolidation’ while incomes somehow — no one explained how — caught up with prices. And so it is in the stock market today. The market is rising because it’s rising and its fans are expecting a ‘period of consolidation’. By this they mean that the market might, just might, have got a tiny bit ahead of itself and will be flattish for a while until reality catches up with valuations. This is a tempting idea, just as it was at the height of the property bubble. But it comes with a problem: it practically never happens.
There is a general consensus that long-term equity market returns are around 7 per cent a year, inflation-adjusted, and there is therefore also an expectation that markets will see single-digit positive returns more often than not. Not so. In fact, years that produce returns of between zero and 10 per cent are the exception rather than the norm. There have been only 19 of them in the US since 1900: in all the other years, the stock market either lost investors’ money or returned them more than 10 per cent.
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