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BULLS & BEARS: Another three-peat past should mean better times

January 24, 2005

In my July 26 column, I speculated whether investors would suffer a threepeat in 2004 of negative five-year returns in the stock market.

I pointed out that the five-year stretches that ended in 2002 and 2003 were losers and, unless the stock market had a great second half, 2004 likely would mark another losing period.

Returns for the Standard & Poor's 500 have been monitored and recorded for posterity since 1928. In those 76 years, there have been 73 five-year rolling periods-1928 through 1932, 1929 through 1933, and so on.

For all of those 73 periods, had you put $10,000 into the S&P 500, reinvested the dividends and cashed out after five years, your average check on the back end would have been $18,500. Not too shabby. In fact, that average cash-out beat the returns from gold, bonds, bank certificates of deposit and even average home prices for the same years.

That's why investors keep coming back to stocks. But-and there's always a but, isn't there?-in nine of those 73 periods you would've gotten back less than $10,000. Ouch. In one out of every eight strolls down Investor Avenue, you would have slipped on a banana peel.

The three most painful of those nine times were the periods ending in 1932, 1933 and 1934. In those Depression periods, you would have gotten back only $5,500 to $6,000. Those three periods were also the first, and for about six decades the only, three-peats of negative five-year returns for the stock market.

Other notables from those nine losers were the five-year periods ending in 1941(Pearl Harbor) when investors would have gotten back $6,800 and 1974 (Nixon booted out), which netted $8,900.

And that leads us to the most recent three-peat, which was marked by the tech bubble's burst and exacerbated by 9/11.

Leading up to the big burst was the granddaddy of all five-year runs. The last half of the 1990s, when $10,000 invested rocketed up to $35,000! That pretty much sums up why money was pouring into mutual funds, stockbrokers were welcomed at cocktail parties, and the public didn't seem to care about presidential dalliances.

As you know, that party ended with a mess. As a result, $10,000 invested for the five years ending in 2002 withered to $9,700 and, for the five years ending with 2003, $9,700 again. Then the five-year run that just ended in 2004 saw $10,000 drop to $8,800.

The second three-peat. It wasn't much fun, but you made it through. And just think of the wisdom you gained!

Will 2005 bring an unprecedented fourth banana peel? Look at history. After the three-peat of the 1930s, the next five five-year runs were winners with $10,000 growing to a back-to-normal average of more than $18,000.

History may not repeat, but oftentimes it rhymes-which leads me to believe the 2005 sidewalk will be banana-peel free.



Dave Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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