A "Lost Decade" Signal Is Upon Us VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - This legendary contrarian says a “lost decade” is coming for stocks
- Our data shows the pain could come even sooner
- Never forget: It’s a market of stocks
- This supremely healthy sector thrives in bear markets
- Which stock the White House will buy next
Stocks just booked their worst day in a month… The S&P 500 and the tech-filled Nasdaq 100 sold off again yesterday, closing at their lowest level in a month. Meantime Bitcoin, a weathervane for risk appetite, dipped below $90,000. The world’s most popular cryptocurrency is now down 30% from its April peak. And it’s erased all of its 2025 gain. As our CEO, Keith Kaplan, has been warning in his Friday Dailys, stock market melt-ups like the one we’ve been living through can quickly turn into meltdowns. But you don’t have to sit idly by and be a victim to them. (Catch up on the latest from Keith here.) Keith isn’t the only one who’s worried about stocks right now… So is legendary contrarian investor Howard Marks. Marks is a name you may not be familiar with. He doesn’t have the larger-than-life personality of other hedge fund titans like Ray Dalio or Stanley Druckenmiller. But his performance says more than any headline-worthy take ever could. Under his leadership at Oaktree Capital Management, which he founded in 1995, his investors saw an average annual return of 19% after fees. That puts him among the top investors of all time. Marks specializes in high-yield corporate bonds. He zeroes in on companies in a crisis that he believes will blow over. He buys their bonds when they’re dirt cheap and collects the high yields this distressed debt pays out. He prioritizes avoiding losses more than chasing gains. He focuses on market cycles, knowing when to play offense and when to play defense. And he knows how important it is to pay the right price for any asset. So when Marks talks, especially in a time of heightened volatility like we’re seeing now, it pays to listen. Marks says stock market investors are facing a “lost decade”… A lost decade is a long stretch – typically 10 years or more – when the market goes nowhere in inflation-adjusted terms. This leaves investors with a flat or negative return, despite all the volatility they endured along the way. It’s hard to imagine these days. But from roughly 1966 to 1982, U.S. stocks looked like a flat line. Prices moved up and down, but after accounting for inflation, investors were left with no gains. Something similar happened between 2000 and 2010. The S&P 500 delivered essentially zero total return over the decade once you adjust for inflation. You had the dot-com crash, the 2001 recession, the housing boom, the housing bust, and you ended the decade right where you started. And according to Marks’ research, when the average forward price-to-earnings (P/E) ratio of the S&P 500 has been above 23, the next 10 years saw an annualized return of between -2% and 2%. That’s a concern. Because the forward P/E ratio – the share price divided by expected earnings over the next year – is at 25 today. And it crossed above 23 last June. Now, 10 years is a long way out. It’s hard enough to predict what you’re going to eat for dinner tonight, much less what you’ll be up to in 2035. So I asked Lucas Downey, editor of our Alpha Signals advisory and our resident expert in signal studies, to look at this setup on a much shorter timeframe. If you’re not familiar with the term, a signal study is a test that checks how a specific market signal — say, a price pattern, indicator reading, or fundamental trigger — would have performed historically to see if it reliably leads to future gains or losses. Lucas looked back over the past 25 years, searching for weekly instances when stocks traded above a forward P/E of 23. And he charted what happened on shorter timeframes. That doesn’t look good, either… 
As you can see, in addition to stocks putting in a lost decade after this setup, the short-term returns aren’t much better. Stocks were down more than half the time on timeframes ranging from one to six months. The hit rate is even lower at 12 months and 24 months, with stocks positive just 19% of the time. And two years out, you typically see the start of a bear market – defined by a 20% drop from a peak.
There are two ways to protect your wealth… One, as we’ve been reminding you constantly over the past few weeks, is to get your risk management in order. Many traders take on positions without any idea of what they’ll do if they turn against them. Almost as bad, traders will buy stocks and ride them ever higher in a bull market, with no clarity on when they’ll take their profits. Stop losses solve both problems. And combined with TradeSmith’s software, they become even more useful. A stop loss is a predetermined order to sell a stock at a certain price. Say you buy stock ABC at $100 a share. You would set a stop loss to sell the stock at $90, ensuring you only lose 10% and no more. Even better than that is a trailing stop loss. These protect you more effectively on winning investments. On that same trade, a trailing stop loss of $90 would rise with the stock price. If the stock traded at $110, then fell back down to $100, you’d sell there and break even. Our TradeStops system takes trailing stops to the next level. By looking at a stock’s historical volatility – how much it moves, up or down, on average over its trading history – you can use our TradeSmith Volatility Quotient (VQ%) trailing stop. That’s a smarter stop loss that’s optimized for the stock you’re trading. See, it may be normal for a high-flying tech stock like Tesla (TSLA) to go through a drawdown of 20%, 30% – even as much as 48%, according to our data... But for a stodgier blue-chip stock like Walmart (WMT), a drop of 13.4% is the most you should accept. So you want to set a wider stop for Tesla than you do for Walmart. Our system spots this automatically – and picks the right trailing stop for you. We offer volatility-based stop-loss recommendations on thousands of stocks. It’s why our subscribers use our software to track $30 billion in assets. There’s the market, and then there’s the stocks that comprise it. We can’t treat every stock the same… and so we don’t. That’s not to say you can’t profit in a lost decade… You just need to be smart about how you invest. A simple “buy-and-hold the S&P 500” strategy won’t cut it. If a bear market is coming, or even just a long period of stagnation, it helps to know which types of stocks are best suited for these kinds of markets. Let’s look at the last bear market for guidance. From the peak in December 2021 to its trough in September 2022, the S&P 500 fell more than 24% – that’s the darker blue line below. But plenty of sectors did a lot better, especially Energy (XLE) – those are the other lines far above the S&P: 
Energy ran up more than 49% in 2022 as Russia’s invasion of Ukraine choked off energy supplies. And although Utilities (XLU), Staples (XLP), and Healthcare (XLV) also fell, they fell by half (or less) than the S&P 500. It wasn’t much different in 2008. While darn near everything lost money in the Great Financial Crisis, these same key sectors lost a lot less: 
This narrows the playing field. If we want to find stocks that have a chance at outperforming in a bear market, focusing on these groups gives us an edge. Among these sectors, Utilities stands out. Of all the sectors, XLU has the highest number of individual stocks trading in the Green Zone – our measure of an uptrend based on a stock’s historical volatility. 
No utilities companies in the XLU ETF are trading in the Red Zone – our measure of a downtrend based on the same metric. And this group has one of the lowest Volatility Quotients (VQ%) of all sectors. Said another way, these stocks don’t bounce around dramatically like, say, tech stocks do. Utilities are trading well now likely because of the increased energy demand for the servers that host AI programs. That also helps our case. Even if we don’t get the lost decade Marks sees coming, it’s good to be in utilities companies, regardless. Since the read on each sector that I showed you above was based on our Long-Term Health indicator, I then ran a quick screen for utilities stocks that recently crossed into our Short-Term Health Green Zone – indicating more recent momentum. At the top of the list was the New Jersey-based Public Service Enterprise Group (PEG). This utilities stock has been a laggard in 2025, but saw a big run up in 2024 as the AI datacenter buildout took hold: 
It’s also a steady dividend payer, with 2025 marking its 14th consecutive increase in its annual dividend to $2.52 per share. (That makes for a 3% dividend yield at current stock prices.) If you’re concerned about a bear market – or even just this current patch of volatility – adding some exposure to well-performing utilities is a good move. Technology is fragile, but materials are forever… If you read yesterday’s Digest, you know that we here at MarketWise have been focused on a little-understood truth of the AI megatrend. While everyday investors have been chasing semiconductors, datacenters, apps, and robotics to try to profit on AI… one area of the market has quietly seen a surge in buying from the federal government this year. And that area is about as far away from high-flying technology as it gets… natural resources. For AI and really any advanced technology to exist, key companies have to extract resources like metals and energy fuels out of the earth. That’s why the White House is scrambling for stakes in key resource players in order to cement the U.S. as the AI hub of the world. For most investors, following the White House’s resource target seems next to impossible. But one resource investing legend, Rick Rule, believes he knows where the government is looking next. Rick is perhaps the world’s best resource investor. Over his 50-year career in the space, he’s backed multiple 100x–1,000x winners, including Lumina Copper, Pan American Silver, and Paladin, and he was an early investor in Franco-Nevada’s 124,000% rise. He’s coming forward later tonight with his plan to find the stocks best positioned to be the next big White House target in the Stocks that Save America Summit. In a moment of great irony, a Cloudflare outage delayed the debut of the summit – highlighting the fragility of technology against the enduring strength of the natural resource sector. That means you still have time to sign up for tonight’s webinar and get access to the stock pick everyone will wish they owned in six months. Click right here for the full details. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily | 
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