Wednesday, January 1, 2003
Signs indicate the stock market could be headed for a long period of stagnation, a historian says.
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 in the market for the past three years -- 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.
What history shows
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 episode 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 for 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 five 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 & amp; 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 & amp;P 500 would be at roughly 1650 in 12 months, but it turned out to be about 500 points high.
What strategist expects
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 & amp; Sons chief equity strategist Stuart Freeman is in the same ballpark, expecting 1100 on the S & amp;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 & amp;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 proved 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."