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Carla Pasternak's Premiere Issue of High-Yield International Just
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The
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Despite the U.S. national debt, there is a silver lining for income
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Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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Will 2009 Deliver 1975's +31% Gains? |
[http://www.streetauthority.com/includes/article-top-ao.htm]Published:
January 5, 2009
Investors have been subjected to
enough news about bankruptcies, bailouts and this Bernie Madoff fellow. 2008's losses were murderous.
While no
one breathes a sigh of relief after having the wind knocked
out of them, investors are certainly ready to move on.
Hopefully, it won't take too long before the market starts to make back
some of its gains. Conventional wisdom says the recession
will draw to a close in the second half of 2009, though the
market is likely to price in a recovery well in advance. In
fact, historical data shows that January is the month when
most of the year's gains are made.
To understand what 2009 might have in store for
investors, we looked at the performance of the year
following the market's worst years. The average gain in the
S&P 500 was +1.8% for Januaries following a bad year -- nine times stronger than the
average January performance over the past ten
years. Yet that advance tended to evaporate by the first half
of the year, sliding into a negative -0.8% by the end of June.
In the second half of the year, stocks again found an upward
trajectory, finishing the year with an average gain of +1.9%.
While still a gain, +1.9% doesn't exactly ignite the
fire of most investors. But to some extent, the
comparisons may be a bit dubious. For one thing, the
market environment today is vastly different than it was
pre-World War II. So to refine the data, we excluded 1930,
1931, 1937 and 1941. This new, post-war vantage point isn't
an attempt to gild the lily. In fact, two of those years
offered outstanding gains.
Rather, omitting the pre-war years affords a look at markets that
are more comparable to today's. The Nasdaq didn't exist in
the '30s, and mutual funds were still in their infancy. Another difference is overall market participation: In 1930,
the average American household didn't own stock. That has
changed. Stock ownership had grown significantly by the 1970s
and was even more prevalent in 2001 and 2002. This data set is far
more relevant and comparable.
And, happily, the picture this data paints is also a little
brighter.
The numbers from these five years suggest the market has a 60%
chance of a positive year and a 40% chance of a negative
year. The up years saw an average gain of +32%, while the
down years recorded an average drop of -27%. Combined, the
market's average annual performance across good years and
bad was +8.4%, with the average January showing a +2.0%
gain.
|
Year |
Loss |
Year After |
Jan. 31 |
Jun. 30 |
Dec. 31 |
|
1974 |
-29.7% |
1975 |
+12.3% |
+38.8% |
+31.5% |
|
2002 |
-22.1% |
2003 |
-2.7% |
+10.8% |
+26.4% |
|
1973 |
-14.7% |
1974 |
-1.0% |
-11.8% |
-29.7% |
|
2001 |
-11.9% |
2003 |
-2.7% |
-14.7% |
-24.2% |
|
1957 |
-10.5% |
1958 |
+4.3% |
+13.1% |
+38.1% |
| |
|
Average |
+2.0% |
+7.2% |
+8.4% |
The historical
averages are somewhat comforting, but the real clues to
2009's performance can be found in three important factors.
First, there's a tremendous amount of
money on the sidelines.
Bloomberg and the Leuthold Group tallied up cash, bank
deposits and money-market balances and found that there's
$8.9 trillion sitting around. That's equal to 74% of the
value of all U.S. stocks, which is greatest cash hoard since
1990.
Cash on hand reached $604.5 billion in September 1974, representing
a record 1.21 times U.S. stock capitalization. In the
six-month period that followed, stocks gained a hefty +31%. The
fact that we have so much money waiting to get back into the
game is probably the most compelling reason why 2009 will be
more like 1975.
Bottom line:
Cash always seeks opportunity. Investors aren't
going to stay on the sidelines.
Second,
valuations are low. There are scores of strong,
stable companies available at a steep discount. The 30
members of the Dow Jones Industrial Average are trading at
11 times earnings; an aggregate P/E of between 15 and 17 is
more typical.
The NYSE Composite Index also suggests prices are cheap: Its stocks are
selling for 14.5 times earnings; 20 is a good rule of thumb. The S&P, at 20 times earnings, seems closer to its norms,
though the S&P is skewed northward by its Nasdaq
constituents, which are still valued at a stratospheric 32
times earnings.
Bottom line:
Low prices never last. That's just the law of
supply and demand.
And finally,
the yield on short-term Treasuries is zilch.
When
the downturn reared its head, the headlines were grim, and
panic grabbed the market by the throat. At that point, investors
were willing to accept safety, even at safety's relatively
high price and low return. Now, however, investors are ready
to put that behind them. They know a recovery is imminent
and they're eager to capture its gains, or, at the very
least, to begin to recapture their losses.
Bottom line:
Money always goes where it is treated best.
With rates low, equities are what's left. Look for the blue
chips to lead the rally.
January is already off to a decent start.
Although volatility is lower than it's been, it will still likely be a bumpy
ride. But the historical record and current market
conditions bode well for investors. Let's hope it's 1975 all
over again.
Many happy returns! [http://www.streetauthority.com/includes/editor-profiles-ao.htm]
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