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Roger McNamee, a technology guru, suggests
in Barron’s last month that the current investment climate is equivalent
to horseshoes and hand grenades. That is, stock prices are so low that
a lucky toss (stock pick) may win big, but there are still plenty of "hand
grenades" ready to go off. Some would suggest this analogy could
apply to the entire stock market today!
However, savvy long-term investors—which may become an oxymoron—who
have studied the data on markets going back a century or more will point
out stocks have outperformed T-bills more than 80% of the time when the
holding periods are 10, 20 or 30 years. The premium one earns for the
risk in stocks has been 5%-plus per year. Now, with risk-free ‘bonds’
paying 1.5% to 3%, two points jump out. First, safety doesn’t pay
much. And second, if history is right, stocks will return 6.5% to 9.5%
a year in the next market cycle.
More than $4 trillion is sitting in safe money instruments, cash and checking
accounts and is dry powder for future stock buying.
Add to that liquidity Alan Greenspan’s even hand at the Fed till,
minimal inflation and the U.S. dollar: Markets are still the best (and
safest) in the globe. With these ingredients, history should repeat itself.
The savings-and-loan crisis of the ‘80s recapitalized our banking
system, and our current evenly divided Congress is unlikely to pass legislation
(the steel protection bill notwithstanding) as devastating as Smoot Hawley—which
some suggest assured the "Great" in the Great Depression.
The bond market yield curve has developed a normal shape—you get
paid more for longer-term investments. The shape, economists point out,
means a recovery is around the corner.
Between the talking heads on TV and the media hype in general, you can’t
find a soul who doesn’t know the stock market is in a bear mode,
many business leaders are headed for hard times in stripes and The New
York Times tries to broadcast the battle plans for the invasion of Iraq.
Is it possible this bad news is already priced into stocks?
Finally, the last six bear markets lasted an average of 524 days and were
down 36%. Today, this bear has been prowling for 866 days and is down
42%.
Hint: just as magazine covers in 2000 touted "Markets Grow to the
Sky," the covers now are on bottom fishing, vulture bond buyers and
the Economists' "The Wickedness of Wall Street." These "highly
sophisticated economic forecasting tools" may signal another sea
change – not the most opportune time to leave the game.
Tom Bash is the managing director of EBK Capital Group.
Phone: 913.345.9889. tbash@ebkgroup.com
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As surely as night follows day, the aftermath
of manias must naturally run to exhaustion. The Depression-1930s followed
the roaring ‘20s, the stagnant ’70s followed the enlightened
‘60s, and now the "malaised" 2000s must deal with the excesses
of the new paradigm ‘90s.
The 1901-05, 1929-32 and 1972-74 bears each produced dramatic declines
that were needed to cleanse the preceding bull market follies. In each
of these periods, the concomitant wealth evaporation was so devastating
that most individuals eventually swore off of stocks entirely.
The current bear market is also one of secular proportions--following
five consecutive years of 20%-plus returns in the late-1990s--as most
investors are emotionally trying to cope with the obliteration of $7 trillion
in wealth.
No one knows for sure whether now is a good opportunity for beleaguered,
risk-averse investors to cash out, or the beginning of a long-term base-building
period. Most probably, the market lows of July 24, 2002, will remain in
place for the intermediate term (six months to one year), but they are
not likely to be the final trough for this cycle, as the 1995-2000 bubble
period will take more time to correct.
As a reasonable long-term target, we expect a 50% retracement of the 17_-year
bull period, which began on Aug. 15, 1982 (at Dow 777) and peaked on Jan.
14, 2000 (at 11,723). If our outlook is correct, the final nadir for the
Dow would be around 6,250, late in the current decade.
In the meantime, individual stocks and sectors will offer opportunitistic
one- to three-year trading moves that can be very productive. Valuation
disciplines should be designed to minimize emotional distraction and help
maintain focus on worthwhile fundamentals.
Buy-and-hold investing is NOT a failed technique--it just requires selective
execution where risk-reward possibilities are most attractive. However,
our conviction is that the pain will cease, only when the last fear-driven
investor bails out.
Dave Anderson is president of Gold Investment Advisers. He can
be reached at 913-396-0305. E-mail: daveanderson@goldcap-kc.com
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