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After four decades of incredible performance, the stock market could be at the beginning of a lost decade.

Yes, the S&P 500 has dropped 2.5% on Friday, and is down 23% in 2022. But it’s impossible to overstate just how good stock market returns have been for investors over the last 40 years—and for even longer. From the

S&P 500’s
low of 102.20 in 1982 through its peak of 4818.62 in January 2022, the index returned 12.9% annually including reinvested dividends. That’s slightly above the average of 11.8% going back to 1928.

But the stock market goes through “lost decades,” periods where returns are hard to come by. The most recent occurred from the dot-com peak in 2000 through 2013, when the stock market finally broke out in a meaningful way. Before that, the stock market remained mired in a decade-plus trading range from 1968 through 1982, when the S&P 500 returned just 4% annualized including reinvested dividends.

There’s reason to think a similar period of sideways trading could emerge out of today’s market chaos. Société Générale’s Albert Edwards has been singing the same tune for a long time about the end of what he calls the “Ice Age,” a period of “secular stagnation” that left yields low and boosted asset prices. But now, he looks like he may be right. Instead of printing money and cutting rates to boost the economy, central banks will now have to deal with governments that seem more willing to spend than ever, bringing “higher growth, higher inflation, and higher interest rates across the curve,” he writes. “The party for investors is over. The Great Melt won’t only melt the ‘Ice’ in ‘Ice Age’, but investor returns are set to melt away too.”

If Edwards is correct, it will come as a shock to investors who are used to stocks going up most of the time, and a Fed that always had the market’s back. It will also require more than a simple buy-the-S&P-500-and-hold strategy. Stiefel strategist Barry Bannister has argued that investors will need to be more tactical, buying when the market is weak and selling when it is strong. Dividends, too, will be far more important. It’s one reason the S&P 500 could lose 5.7% from its 1968 high through its 1982 low and investors could still emerge with a positive return, at least before adjusting for inflation.

Investors have been spoiled for a while. Now we’ll have to work for our money.

Write to Ben Levisohn at [email protected]