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A Decade of Decline
New York: January 04, 2010
By John Stephenson

It's always amazing to look back over the decade and reflect on just how much has happened. Unfortunately for U.S. investors, it isn't a pretty picture. The decade that started off so promisingly with newly minted billionaires seemingly popping up everywhere in Silicon Valley has ended in despair. The technology boom that made so many people in California rich, quickly turned to rot. And in the process, Silicon Valley turned into Death Valley, sinking the economic hopes and prospects for the state of California .

It's also been an awful decade for Wall Street. It, along with Silicon Valley, stood as the two most visible symbols of America 's preeminence in all things economic a decade ago. With the repeal of Glass-Steagall, an act that separated commercial banking activities from investment banking, Wall Street's power and influence grew dramatically. After the tech wreck of 2000, Wall Street and the world of high-finance stood alone as the sole leader of the American economy. And that dominance was reflected in its weight and overall importance in the S&P500 stock index. By the end of 2007, the financial services sector was responsible for 40 percent of all S&P500 earnings—up sharply from its historical contribution of 15 percent.

Wall Street grew quickly because it used financial engineering and other forms of chicanery to boost its earnings. And there were plenty of willing buyers out there, who wanted a piece of the action at any price. America and its publicly listed companies benefited from a global perception that in all things global, America was simply the biggest and the best at what mattered most.

Both technology and high-finance grew rapidly as they were easy to export and both industries relied heavily on the notion that creativity was limitless and so too were their profits. After all, American technology and high-finance were transforming the world. But, as they promised too much and delivered too little, their businesses began to unravel.

At the start of this next decade, America sits without a single major industry that is a world leader. Over the previous decade, the U.S. stock market capitalization shrunk from $15.104 trillion to $13.69 trillion. No longer is American industry competitive globally, educational standards are below the global median and the crime rate is amongst the highest in the world.

For investors, the last decade has been a nightmare. It now ranks as the worst decade in nearly 200 years of American stock market history. Since the end of 1999, stocks traded on the New York Stock Exchange have lost on average 0.5 percent annually over the last decade. Investors would have been better off investing in almost anything other than the U.S. stock market. Stuffing your money under a mattress or buying gold would have been a savvy move—following the wisdom of Wall Street and buying and holding was a sucker's bet.

And yet after a decade of decline, stocks on the S&P500 are anything but cheap. According to Yale professor, Robert Shiller, stocks on the S&P500 index entered this past decade trading at an all-time high of 44 times earnings on an inflation adjusted basis. After a disastrous decade, Shiller believes that stocks are still trading at 20 times earnings—a measure considered high by historical norms.

As I point out in my book Shell Shocked: How Canadians Can Invest After the Collapse , America will never, ever be the same. Two economies that at the start of the decade, no one seemed to care about—China and India—are now the new powerhouses of global growth. Over the past decade, India 's stock market capitalization has grown from $148 billion to $1.282 trillion and China 's has soared from $581 billion to $3.168 trillion.

Over the next decade, the S&P500 will underperform most other major stock market indices. Not only is it relatively expensive, but there isn't a single industry group that has the potential of becoming a world leader. The pharmaceutical industry is the only group with a reasonable promise of global leadership, but the new Obama health care reform and a Congress that wants to clamp down on the industry, will ensure that future profit growth remains constrained.

We are entering a period where what has worked in the past is unlikely to work in the future. China is on the rise and so too are the resource economies of South Africa , Canada and Australia . The best bets to make for the decade ahead are going to be similar to what worked in the 1970s—commodities and not a whole lot else.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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