Long Term Perspective

The second half of the 1990s is associated with an economic and stock market boom. It is more realistic to look at long-term trends in the stock market to get a better picture of potential returns going forward. Extrapolating just from the past few years would be erroneous whether we would expect extraordinary returns - or losses. Studies have shown that the long-term average return in the stock market - dating back to the turn of the (20th) century - was roughly 10 percent per year. Notice that the 10-year average annual gain drifted higher in the second half of the 1990s. Despite declines in 2000 and 2001, the 10-year change averaged 11.8 percent.

Short Term Perspective

Strong economic growth boosted corporate profits - helping to lift stock prices - during the second half of the 1990s and generating an extended bull market. Stock prices grew so rapidly that many analysts - including Federal Reserve chairman Alan Greenspan - worried about a speculative bubble. Indeed, stock prices tumbled in 2000. Looking at the year-over-year changes, note that negative returns weren't realized until late in 2000, throughout 2001 and 2002.

The S&P 500 jumped 5.7 percent in November after an 8.6 percent spurt in October, managing to offset September's plunge. This index has risen in five of the past twelve months, and the declines were larger than the gains this year.