-- History Says Markets Unlikely to Bounce Back Quickly from Recession --
By Andrew Countryman, Chicago Tribune
Knight Ridder/Tribune Business News
Dec. 29--An economy still trying to steady itself after a recession. An
up-and-down market after some glorious gains. An uncomfortable unemployment
rate, but low inflation. A Texan in the White House talking about war.
Although that, in many respects, describes the situation for investors
heading into 2003--with an emphasis on the down for the past three years in the
market--it bears some striking similarities to the case nearly four decades
earlier, at the end of 1964.
And the result may well be the same: dramatic price swings in the short
term, but little, if any, net gain over many years.
The climate in 2003 is hardly a carbon copy of 1964, but similarities
exist.
In the 1960s, the economy was more robust. It had roared out of the 1960-61
recession, but growth was erratic. Unemployment was lower, but had doubled from
its mid-1950s low. Inflation was even less an issue than today.
The market wasn't nearly as battered in December 1964 as it is now, but the
Dow Jones industrial average had fallen in two of the previous five years, after
several big gains in the late '50s.
Back then, the war clouds turned out to be more than ominous: After the
Gulf of Tonkin incident in August 1964, the U.S. role in Vietnam escalated
dramatically.
The Vietnam War proved the backdrop for much of a 17-year period that saw
the Dow trade in a vast range, but with no net change--from 874.13 at the end of
1964 to 875 at the end of 1981.
A group of chart-watching technical analysts, stock market historians and
other experts say the current outcome may be discouragingly similar to the
buy-and-hold true believers.
"This is probably what we're in for in the years ahead," said leading stock
market historian Richard Sylla, an economics professor in the Stern School of
Business at New York University who based his reading on decades of trading
patterns.
If stocks slide further in 2003, it would give the Dow its first stretch of
four straight losing years since the Great Depression. That's no shock to Sylla,
given the unprecedented five straight years of double-digit gains to close out
the '90s.
"Typically, the returns are much lower for the next 5 to 15 years" after
such enormous gains, he said.
Several factors are working against a sharp bounceback from the last three
years' losses, Sylla and others said.
The influx of new market participants in the '90s who still routinely put
money into stocks throughout the downturn may have kept the fall from being
worse than it was, but that also tempers a recovery. Sylla said previous bear
markets brought multiples so low that bargain-hunting lifted stocks; this time
around, he said, stocks have remained more fairly valued.
And history suggests counting on an improved economy to resuscitate
portfolios may be disappointing: Despite oil shocks, startling inflation and
rising interest rates, the economy averaged 3.4 percent annual real growth from
1965 through 1981, even as the Dow averaged a 0.006 percent annual increase.
Predicting the stock market's behavior is dicey under any circumstances,
much less a decade out. In the short term, however, many experts said 2003 could
well bring more of the up-and-down movement that has characterized the last few
years, though several expect a generally upward trend.
Abby Joseph Cohen, the superstar strategist at Goldman Sachs, set a
fair-value target for the benchmark Standard & Poor's 500 of 1150 at the end of
next year, up 31 percent from current levels. Of course, in November 2000, the
seemingly perpetual bull thought the S&P 500 would be at roughly 1650 in 12
months, but she turned out to be about 500 points high.
Despite the many wild cards facing the U.S. market--including the economy,
corporate corruption, consumer and corporate debt, terrorism, oil prices, a weak
global economy and the situation with Iraq--A.G. Edwards & Sons chief equity
strategist Stuart Freeman is in the same ballpark, expecting 1100 on the S&P a
year from now.
Freeman bases his case on an improving climate for corporate profits: If
profits increase 12 percent next year, as currently expected, the S&P 500 would
reach 1100 with a trailing price-earnings ratio of 20, which, he said, "is not
at all out of line."
Earnings, of course, remain a monumental question mark for stocks. Quarter
after quarter, analysts' early predictions of profit recovery have proven too
optimistic, but Freeman sees positive signs for next year, including an improved
performance by financial and consumer discretionary companies and the Federal
Reserve's half-point cut in interest rates last month.
"I think there's upside in earnings as consumer confidence picks up," he
said. "There's a great deal of leverage in the economy."
Likewise, RBC Dain Rauscher investment strategist Bill Barker expects
earnings growth of 13-14 percent next year, with a corresponding increase in
stocks. A bonus: Earnings likely will be higher quality.
"The earnings that you see going forward--I hope beginning with the fourth
quarter, but certainly in the first quarter--should be fairly clean, fairly real
earnings," Barker said.
Although often painful for investors, the wave of scandals that rattled
corporate America and investors over the past year have resulted in a marked
effort to tidy up balance sheets. Indeed, Goldman Sachs researchers estimate
companies in the S&P 500 will write off $15.30 a share this year--a whopping 36
percent of operating profits.
"The transparency of earnings will improve substantially in 2003," Barker
said.
That massive cleanup is among several moves that could lift the market next
year. Others include the Sarbanes-Oxley corporate governance law, this month's
settlement of investigations against Wall Street analysts and an expected move
toward more favorable tax treatment for dividends.
While many of the experts say stocks seem to have hit bottom this year,
they also say that bonds seem to have topped out. The flight to quality has
driven Treasury yields to their lowest level in more than four decades and
widened the spread between Treasuries and corporate bonds. Fixed-income experts
said those extremes are likely to ease in the coming year.
Similarly, analysts expect more moderate activity in initial public
offerings and corporate mergers in 2003, after swerving from frenzied activity
in the late 1990s to a virtual shutdown in the past two years.
Indeed, while analysts at Renaissance Capital have found that the handful
of IPOs launched this year have outperformed the market on the whole--including
Lincolnshire-based consultancy Hewitt Associates Inc., the year's third-best
performer, according to Renaissance--overall issuance was the lowest since 1979.
While IPOs were concentrated in larger, high-quality companies this year,
analysts said they expect an improving overall climate to entice more firms into
the market in 2003.
If the market climate indeed improves, at least in the short term, the
market could revisit the dominant phenomenon from that 1965-81 period: a series
of sharp rallies and declines that analysts say provides opportunities for the
savviest investors to make money, even in an overall flat market.
"I think that we could have a market that provides very little net gain
over the next two to three years, but one with significant rallies that allow
people to trade," Barker said.
Some see a much longer stretch: Dick Strong, chairman of Strong Capital
Management Inc. outside Milwaukee, said in a recent roundtable that he expects
the Dow to trade "in a channel" between 7500 and 11,500 for as long as a decade,
highlighting the need for effective stock-picking.
Many experts, of course, say it's foolhardy to try to time the market. And,
consequently, they say, don't expect a big influx of money from investors
convinced that the market's problems are now behind it.
"Usually, investors leave together, but they come back one at a time,"
Freeman said.
-----
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(c) 2002, Chicago Tribune. Distributed by Knight Ridder/Tribune Business
News.
30-Dec-2002 08:08:00 GMT
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