Goodbye to Monster Stock Gains
1 hour, 50 minutes ago
By Pierre Belec
NEW YORK (Reuters) - Get ready for a new era.
Stocks will move higher, but the gains won't be anything like investors got used to a few years back, some experts say.
In the days of the great bull market of the 1990s, investors tacked on outlandish valuations to the stocks of companies with lousy business models as Wall Street's cheerleaders said "this time it really is different." Corporate profits and dividends didn't mean a thing. Stocks could generate double-digit returns, no matter what.
Now that the market is headed into its third straight year of losses, people are brushing up on the fundamental stuff that dictates how stocks are priced. And the rich rewards of the 1990s mania may be a thing of the past.
Expect the market to chalk up lower returns for the rest of the decade, says Jeffrey Kleintop, chief investment strategist for PNC Advisors in Philadelphia.
"Stocks are likely to return 7 to 9 percent per year," he says. "These are lower-than-average returns on an absolute basis, but are in line with historical trends when adjusted for inflation."
Kleintop says the returns will come solely from earnings growth, which has historically hovered at 7 percent for the Standard & Poor's 500 companies.
DIVIDENDS BACK IN STYLE
The good news for widows and orphans who depend on quarterly checks from companies to make ends meet in times of stagnant stock markets: Dividends will again be a meaningful part of making money in the market.
"With lower absolute returns, investors and corporate leaders may once again view dividends as an effective way to return value to shareholders," Kleintop says.
During the boom days, dividend sank to the lowest level since the early 1940s. Corporate America thought dividends were dorky things. Investors didn't lose any sleep when companies canceled or slashed payouts because they were making profits of 20 percent or more each year on their stocks.
FROM HULA HOOPS TO YELLOW TIES
Going forward, there will be few great investment stories.
The technology bubble made a lot of people rich in the 1990s. That was then. The betting is techs may be dead in the water for years. During the last earnings recession in 1990 to 1991, technology companies didn't regain their pre-recession strength until 1994.
Over the past several decades, other investments have become lemons. In the 1980s, consumer stocks exploded on pent-up demand following back-to-back recessions, but they flat-lined in the 1990s. Energy stocks surged in the 1970s before imploding in the 1980s.
Barton Biggs, chief global market strategist for Morgan Stanley, says the message he got from speaking with aggressive investors is that they are bracing for low returns in virtually every major asset class for the next five to 10 years.
"Overall, it's going to be slim pickings, and large portfolios will find it very difficult to generate total returns in the years to come, of even 8 percent per annum.
"Sure, there is going to be some differentiation, so asset allocation will matter," he points out. "But double-digit asset classes are few and far between -- and illiquid."
The nastiest bear market in a generation has investors all shook up. It will take time to rebuild confidence in stocks.
For example, after the 1929 crash, the healing process took about 20 years. Some Wall Streeters believe the damage to investors' sentiment from the current bear market is nearly as bad as the aftermath of 1929.
Has the public caught on? Yes, so it would appear.
Most people have adjusted their expectations. Individual investors who have been humbled by the longest bear market since 1938 to 1942, no longer assume stocks will rise each year.
More than $7 trillion in market wealth has been lost over the past three years and the average stock mutual fund is down a whopping 50 percent or more. The third quarter of this year saw the worst returns from stock funds since the 1987 crash.
Merrill Lynch estimates investors withdrew a record of nearly $100 billion from stock funds in the five months to October. There was a measly inflow of $13 billion in November.
DARE TO BE DULL
A lot of investors are sitting in bonds or dull money markets, which have been some of the best-performing asset classes since March 2000.
Individual investors have learned that the smartest strategy is to lay out reasonable outcomes for stocks. They've concluded the possible risky outcomes are still intolerable.
The Investment Company Institute, a mutual fund trade group, says an eye-popping $2.4 trillion was parked in money market funds at the end of November.
"That's a lot of cash, considering, there's only $2.5 trillion currently invested in equity mutual funds," says James Stack, editor of InvesTech Research. "Last year, investors poured a record $376 billion into money funds, or more than twice the preceding year's contributions."
Indeed, investors have discovered the road to wealth may not always be paved with stock mutual funds. Only two of the 100 largest stock mutual funds had positive returns for the 12 months ended on Sept. 30.
If history repeats, bond funds will be a safe haven until the Federal Reserve (news - web sites), which has pushed interest rates down to 41-year lows, decides to raise rates. Money tightening won't happen until central bankers are reasonably confident the economy and corporate earnings can mount a sustained recovery.
The smart money is not betting the ranch that the economy's problems will simply vanish. Gross domestic product, which measures the output of all U.S. goods and services, grew by 4 percent in the third quarter. Yet the concern is fourth-quarter GDP (news - web sites) growth may slow to 2 percent or less. The jump in the jobless rate last month to 6 percent -- the highest since the summer of 1994 -- was a signal that things are just not right in the economy.
As a result, the economy will write the script for the stock market.
The Paris-based Organization for Economic Cooperation and Development, which has a good track record, does not see a tremendous economic recovery for the United States. It projects U.S. growth at an anemic 2.6 percent next year.
You don't have to be a rocket scientist to figure it out: Flat growth in the nation's GDP is bad for corporate earnings.
For the week, the blue-chip Dow Jones industrial average (^DJI - news) fell 212 points or 2.5 percent to end at 8,433.71, based on the latest available figures. The broader Standard & Poor's 500 (^SPX - news) finished at 889.48, down 23 points or 2.5 percent. The tech-heavy Nasdaq composite index (^IXIC - news) lost 60 points or 4.2 percent to end at 1,362.42.
(Pierre Belec is a free-lance writer. Any opinions expressed are those of Mr. Belec.) |
