Izidor Flajsman at TD Securities analyses past US equity ‘lost decades’ and finds that headline indices delivered flat to negative real returns, while Small Cap, Value, Energy and Non-Durables outperformed. The study is descriptive rather than a call on US equities, focusing on how sector and factor leadership historically rotated away from expensive, cyclical parts of the market.

Small, cheap and insulated factors win

"We do not take a view on US equities in this note; rather, this note asks a narrower and more useful question: which passive and dynamic strategies across fixed income, commodities and equities have historically tended to do well, or poorly, once a lost decade was already underway?"

"This is the whole point of a lost decade — flat to negative real returns for over a decade, after a regime that otherwise compounds at high-teens."

"Equities: -0.2% annualized real return in lost decades, vs. 16.9% outside them."

"Inside lost decades, the ranking flips completely, and four names have done the work: Small Cap, Value, Energy, Non-Durables."

"Outside lost decades, the S&P 500 puts up ~17% annualized real returns and every sector and style basket in our universe trails it."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)