October 18, 2007
To infinity and beyond?
Posted by Fred Tung

We generally take as an article of faith that stock prices will rise in the long run.  And the evidence so far tends to bear this out.  Over any 20-year period, US markets have produced positive real returns.  A recent Economist piece suggests caution, however.  It notes the dismal long-term performance of the Nikkei, bellwether for the world's second largest economy.  The Nikkei is still at less than half its peak, which it hit in the late 1980s.  Recounting the conclusions of a 2004 study by London Business School professors, the article notes that only 3 of the 16 stock markets in continuous operation in the 20th century can match US markets' any-20-year-period positive returns.  In Japan, France, Germany, and Spain, 50 or 60 years could elapse before positive returns came; in Italy or Belgium, it could be 70 years.

The possibility of not-always-rising markets strikes fear in the heart of anyone with a 401(k) or an IRA, including me.  The privatizing of retirement in the US means that all of our futures ride on the stock market.  Social security may be a pipe dream for those of us not too close to retirement.  Imagine the turmoil if an entire generation's retirement savings were wiped out--or even significantly curtailed--by
a prolonged market downturn. 

Hey, maybe that's cause for optimism.  The government couldn't possibly allow the markets to languish over the long term.  The political backlash would be severe.  Perhaps the recent mortgage-crisis rate cut and Treasury-led bank bailout fund are signs of the times.  The federal government is in effect trying to stem a run on the bank.  Perhaps if investor confidence can be buoyed for the short term, the market can correct itself without too much long-term damage.  More generally, with the government standing behind the market, we can't lose in the long run.  Right?

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