[BRIEFING.COM] Four Reasons To Stay Optimistic 29-Jan-01 06:56 ET
[BRIEFING.COM - Robert V. Green] It is tempting to be pessimistic about the stock market because of the dramatic change in tone during the year 2000. But there are many reasons for optimism, for long term investors. Here are four.
The Government Has Ammunition
There is no question that the economy is slowing. But we are not in a recession, which is two consecutive quarters of negative GDP growth.
And the government has a lot of ammunition to prevent us from heading into a recession.
By historical standards, real interest rates are still high. Real interest rates are the true cost of capital, after adjustment for inflation. At more than 3% percent for short term rates, the monetary policy is very restrictive.
In addition, the government can afford to cut taxes, perhaps dramatically. Forget the political posturing about who benefits from tax cuts; cuts stimulate the economy, which benefits everyone. And while running a surplus, tax cuts are affordable.
This means that as the economy shows stronger signs of decline, the government can provide stimulus as needed. We think it will happen, and fast enough, to prevent recession.
The cost for government stimulation will be higher inflation, but it is a price that will likely be paid.
The Demographics Argument
From a longer range viewpoint, the demographics argument is still a strong argument in favor of higher stock prices.
In short, the demographics argument is expressed as follows:
The overall economy is driven primarily by consumer spending.
In a consumers life-span, the highest spending years are between the ages of 45 and 55.
If you map the population of the U.S over time, tracking the 45-55 age group, you see a demographic bulge of 45-55 year-olds occurring now, and not finished yet.
The demographics argument is simple, but there is a lot behind it.
The best expression of the demographics argument comes from Harry S. Dent, author of "The Roaring 2000s Investor," "The Roaring 2000s," and "The Great Boom Ahead," all of which were best-sellers.
The end result of the demographics argument is that the economy still has at least ten strong years ahead of it before we see a serious prolonged change in the growth rate of the US economy.
The Technology Revolution
Another strong argument for continued economic growth is the technology argument.
Expressed very simply, the technology argument states that the positive effects of information technology have not been as widely adopted as they can be. There are still many applications of economic transactions that have not yet been automated.
For example, dry cleaning stores are still investing in PC-based systems to track laundry and customers, instead of paper tickets. But we still have large sections of the economy that are untouched by automation. One example: coin based vending machines will soon have the ability to sell based on a wireless phone debit transaction. Point your phone at the machine and press "buy."
The implementation of technology makes current economic activity more efficient. Investing in the technology that enables that efficiency will still be rewarding, for at least the next ten years. And the result of increased applications of technology is a higher standard of living.
Still Not A Bear Market
Finally, despite the tone of much of the media, and perhaps many individual investors, this is not a bear market. At least, not for the entire market.
While many technology sectors have been devastated, and many investors have been entirely wiped out, the overall indexes just do not add up to a bear market.
The Dow first hit 10,700, the close on Friday, in April of 1999. It also reached 11,000 in that same month. Since then, the Dow's low has been 9656 in October 2000, a 10% decline. The Dow's high since then has been 11,750, in January of 2000, a 10% rise. In short, the Dow has been in a +/- 10% trading range since April of 1999. That's not a bear market.
A similar calculation describes the S&P500 market, also in a 10% trading range. The S&P500's level on Friday of 1355 was first reached in April of 1999. Since then, the high of 1555, in January of 2000, was 15% higher, but the low of 1245 in October of 1999 was just 8% lower. This range is wider, but nothing like the great bear markets of the 30's and the 70's.
The Nasdaq, of course, has had a much larger swing, reaching its Friday close of 2781 in July of 1999, but with a 85% rise since then, and a 22% fall. But the Nasdaq swing more accurately represents the speculative tide, not the economic tide.
If you want to say we are having a bear market in speculation, you would be accurate. But we don't have a bear market in the fundamental stocks of the American economy.
Summary
In the long term, equities reflect the future value of the underlying economy and the businesses that are a part of that economy. That future is still very positive.
The economy will be able to afford the bubble we have just been through. Declaring that we are in a "bear market" because of the dramatic collapses in internet stocks and the decline in valuations of technology stocks overall is too strong a declaration. The economy is weakening, but the government has ammunition, and apparently the will, to provide stimulus.
All we really need is to flush out the remaining pockets of excess speculation and valuation, of which there are several, and stocks will return to reflecting the positive future we face. We expect that transition to occur during 2001.
Comments can be emailed to the author, Robert V. Green, at rvgreen@briefing.com.
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