Paul Ferraresi

Unless things improve quickly and dramatically, the 2000s will likely be the worst-performing decade for U.S. stocks since the Depression era of the 1930s. While it would be absurd to equate these two vastly different periods of history, there are some interesting parallels.

According to Howard Silverblatt, senior index strategist at Standard & Poor’s, the S&P 500 index returned about 1.0% in the 1930s on an average annualized basis. Through the end of March 2008, the index sported a minuscule gain of 0.6% so far this decade.

Of course, this follows two decades of astonishing equity gains-the index rose 17.6% during the go-go 1980s and 18.2% in the tech-fueled 1990s. It’s understandable that such a robust period like that would be followed by an epoch of lackluster returns.

Broadly speaking, both the 1930s and 2000s were characterized by crises in financial institutions, which led to equity price declines and a desperate need for liquidity. Last summer, liquidity dried, as banks refused to provide additional loans, slowing down commerce.

In the early 1930s, bankers similarly closed up shop to prevent a run and commerce practically ceased. Franklin Roosevelt, then newly-elected as president, ordered the Treasury to print a couple billion dollars worth of notes and made them available to the banks. Restoring liquidity was not all that different from what the Federal Reserve and foreign central banks have been doing by injecting billions of dollars into their financial systems in recent months.

There is another basic similarity between the two periods. In the 1930s, leverage, correlated directly to stock purchases, escalated in an environment of relatively low regulation and low equity.