The Worst Decade vs. The Best Investment

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The Worst Decade vs. The Best Investment During Recessions

By Susan C. Walker
Thu, 24 Dec 2009 12:30:00 ET    Email |  Print  |  RSS Feeds Generated by Elliott Wave International RSS |  My Updates    
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The bad news is out for all to contemplate -- the 2000s were the worst decade ever for U.S. stocks. Tom Lauricella laid out the facts in his article for the Wall Street Journal on Dec. 20, 2009. However, if you have been reading Elliott Wave International's analysis these past 10 years, you not only knew that much earlier than this week, but you also would have had a leg up on how to invest and how to trade to take advantage of bear markets as well as bull markets.
Here are the three key items from the Wall Street Journal article:

    * "In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s."
    * "With two weeks to go in 2009, the declines since the end of 1999 make the last 10 years the worst calendar decade for stocks going back to the 1820s, when reliable stock market records begin, according to data compiled by Yale University finance professor William Goetzmann."
    * "From 2000 through November 2009, investors would have been far better off owning bonds [Editor's note: Bingo! Bob Prechter told his subscribers this back in 2008. See the rest of the story below.], which posted gains ranging from 5.6% to more than 8% depending on the sector, according to Ibbotson. Gold was the best-performing asset, up 15% a year this decade after losing 3% each year during the 1990s."

 Ah, but is gold always the best investment during recessions? This is just the kind of conventional wisdom that piques Bob Prechter's curiosity. He wanted to find out whether that claim would hold up, so, back in March 2008, he put it to the test. As he wrote in The Elliott Wave Theorist, "I have often read, 'Gold always goes up in recessions and depressions.' Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data."
 
The result? He and another Elliott wave analyst ran the numbers, reviewing the behavior of these three key investments during recessions following World War II, from February 1945 through November 2001. This is what they learned:
 
Gold was not the best investment during recessions in terms of total return.
 
The winner was actually Treasury Notes, which had a total return of 9.96%. In contrast, gold had a total return of 8.80%, and the Dow came in at 6.89%. But that's not all – once they figured in the transaction costs for each investment (at a 2008 level), gold fell from second to third place as a worthwhile investment during recessions. The total returns with transaction costs came out this way:
 
1. T-Notes      9.82%
2. Dow             6.85%
3. Gold            4.80%
 
This result turns conventional wisdom on its head. Here's how Prechter sums up the results:
 
The Best Investment During Recessions
 
The most important question, however, is not whether the Dow beat gold or vice versa but whether making either investment would have been better than taking no risk at all. Table 3 [not shown] shows that ten-year Treasury notes beat both gold and the Dow during recessions since 1945, and they did so far more reliably. T-notes provided a capital gain in 10 of the 11 recessions, and of course they provided interest income during all of them. And the transaction costs are low....
 
So if you want to make money reliably and safely during recessions and depression, you should own bonds whose issuers will remain fully reliable debtors throughout the contraction. Of course, as Conquer the Crash [Editor's note: Bob Prechter's best-selling business book] makes abundantly clear, finding such bonds in this depression, which will be the deepest in 300 years, will not be easy. Conquer the Crash forecast that in this depression most bonds will go down and many will go to zero. This process has already begun. This time around, you have to follow the suggestions in that book to make your debt investment work. [The Elliott Wave Theorist, March 2008]

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