You could call it the law of averages, reversion to the mean or a counter-trend reversal, but by any name, 150 years of stock market analysis reveals the same truth.
"What we found when we did the 20-year cycle analysis is that when you come off a period where you've done unusually well, like we had in the period ending in March of 2000, the next 20 years don't look so good" says Jim O'Shaughnessy, founder of O'Shaughnessy Asset Management and author of What Works On Wall Street.
Wait a minute, wasn't this supposed to be a bullish call out to 2020?
As O'Shaughnessy tells it in the attached video, "not so good" would have been the case under normal circumstances. However, those double disasters of the last decade changed everything for the second half of this 20-year cycle.
"What we didn't count on was that we'd have a decade with two severe bear markets in it," he says, noting that the only other time that happened was the 1930s.
But since it did, our reward for enduring all that turmoil, for being so far underwater, should be outsized returns for the remaining eight years out to 2020. The catalyst for that move is actually two-fold.
First, there is just some old fashioned catchin'-up to do. Secondly, he says there's going to be a sort of "ah-ha" moment in which investors acknowledge that a 2% bond yield in a 2% inflationary environment is a loser. And once they do, he says they will act.
"As investors see that is the case and start shifting money to the equity markets," he projects that we will see real returns of 4-8% annually through 2019, or 7-11% if you tack on 3% inflation.
"Because of the damage that was done between 2000 and now, you're already sitting pretty good, so the stock market should do extremely well," he predicts.
Bottom line, he says it will be "considerably better" than anything you would get from the bond market. His outlook is summed up as follows:
"Using a nominal return which does not include inflation, we would expect that at the low end of the forecast we discussed, the S&P 500 would be at 2600 in 2020."
Is the Lost Decade behind us? Will the next be prosperous for stock holders? Let us know your thoughts in the comment section below or visit us on Facebook.