i think it is unlikely that the market will truly "bottom" when so many people are looking for it every day. this is why i think it will take a number of years, perhaps decades to cure the "equity fever" existing at present.
at the market bottom in the early 80s, only 19% of households owned equities; now that number is at 52%, an all-time high. how likely is the market to bottom with this level of participation?
in the late 70s, the average corporate pension fund assumed fund returns of 6%, even though the long bond was trading in the high-single and low-double digits. that is, they could have "locked in" returns at least 50% higher than their assumptions just by buying 30yr bonds, but their assumptions were colored by the bearish mood which dominated at the time. this is what they call the "recency effect" in behavioral finance. that is, looking at the rearview mirror, but not too far into the past.
by contrast, today, with the 10yr at a 50-yr low of 3.67%, the average pension fund assumes returns of about 9%. this means their equity-return assumption must be like 15% or 20%, since these funds may have at least half their money in bonds! this again reflects a tendency to ignore reality and extrapolate from the recent past--i.e., the go-go 90s.
i believe the shortfall against these return assumptions, and the need for corporations to "borrow" from future earnings to meet pension obligations, may be the next scandal du jour after all the Enron, Tyco, etc. stuff is put to rest. already the pension funds have been getting some press, but i think there is more to come. as i recall, there have been estimates that GM alone could face a shortfall north of $50BILLION in a few years (correct me if i'm off).
meanwhile, mutual fund cash levels are near record lows, consumers are tapped out, yada yada.
other than the extremely poor returns on the market these past couple years, i find absolutely no compelling reason to be bullish.
not to mention that the broad indexes remain extremely overvalued by historical standards of even bubble tops, not to mention bear market bottoms.
such is not to say that we won't have very positive months (like August, when the SPX was up an astonishing 23% from the July lows), or even years (i think the Nikkei has had like 5 or 6 runs of 50% or more during its 12-yr bear market), but for a LTBH investor, all that is just "noise".
the thing that is the saving grace in the face of a sideways market (such as the 16-yr stretch ending in 1982 on the SPX) is dividends. paper gains can come and go, but cash remains. it was something substantial when one collected a 4.26% average dividend yield on the market from 1926-2000. however, with today's SPX dividend yield at under 2% (and with a number of the top dividend payers, such as F, GM, and JPM, heck even tobacco stocks, now facing "difficulties"), there is not much to collect unless the hypesters can remonetize hope on a permanent basis. color me skeptical. |
