25 Years Since 2k

As we begin this new year, we are also starting the second quarter of this century.  How time flies!  It doesn’t feel like that long ago when we were worried about the Y2K bug; having a cell phone was a status symbol, and we didn’t realize that Britney Spears was crazy.   As we make our way around the quarter pole of this century, let’s review the events that have shaped investors and various economic markers.

The S&P 500 index began in 2000 at 1,469 and ended in 2024 at 5,881, almost exactly quadrupling.  This raw index comparison doesn’t include dividends, which also quadrupled during the same period.  If dividends were reinvested, an investment in the broad US stock market would have grown by more than six times the original investment.  Inflation also increased the costs of goods and services, but only by a little more than double.  If you had $5 in 2000 and could either buy a Subway sandwich (a relatively novel delicacy at the time) or invest in the US stock market, investing would have grown your $5 to $30.  You could now buy a Subway sandwich for $10 and be $20 wealthier!

However, the path to greater returns than fixed-income investing comes with baggage, most notably periods of uncertainty and market declines.  Although those 25 calendar years had an average rate of return of 7.3%, the average intra-year decline (largest drop from high to low during the year) was 16%.  In fact, the value of the S&P 500 fell by half on two occasions during this period: first in the dot-com bust of 2000-2002 and again during the Global Financial Crisis of 2007-2009.  These two seemingly back-to-back market collapses, and recessions offset the gains during the better years in between and led to a “Lost Decade” in which stock prices were lower at the end of 2009 than 10 years prior.  Historically, this is unlikely as it has only happened a few other times. 

In 2020, the onset of the COVID-19 pandemic sent the market down 34% in 33 days. When inflation surged in 2022, and the Federal Reserve responded with sharp interest rate increases, it dropped another 25%. 

At each of these terrifying chapters in history, investors were worried that they would lose their entire nest egg because “this time is different.”  Some panicked and sold their shares at rock-bottom prices, while others held on and realized life-changing gains. 

From a historical perspective, this quarter-century is not too dissimilar to other 25-year time periods. Although this one had a lower-than-average total return, it still managed to handily beat inflation and fixed-income investments. It had its share of surprises, both on the upside and the downside, but that is par for the course. 

My best guess is that the next 25 years will be similar when viewed from a distance: plenty of surprises and more gains than losses. We should expect market corrections of 10% declines about every 12-18 months and bear market losses of 20% or more every 5 years on average.  On the other hand, history has shown that these losses have always been temporary, and patient investors have been rewarded with outsized gains.

Although the last 25 years have had many periods of concern and worry, the fact remains that those who invested $100,000 in US equities in 2000 and held on through good times and bad now have $600,000 in US Equities. This is what I call “The Package.”  Anything worthwhile comes in a package.  Living a healthy lifestyle means exercising when you don’t want to and eating fruits and vegetables when pizza sounds so much more enticing.  Having a loving family means changing diapers, being the bad guy, and getting bids from auto-body shops when you have teenage drivers.  Growing wealth to provide for a dignified retirement means hanging on and embracing the whole package when it feels like the end of the world. Thank you for letting us go on this ride with you.  It’s been the journey of a lifetime!