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AFTER WEEKS OF SCRUTINIZING every twitch and feint of the indexes, the big picture beckons.
There's been queasy tedium in staring at "key" index levels that "should hold," while stocks move tick-for-tick with the euro, and traders wonder whether fundamentals-driven funds have cash to express their view that "stocks are cheap." The longer view is one of much energy expended to go nowhere.
Admonitions to keep the big picture in mind usually take the form of a resigned lament. Large-cap stocks delivered a negative annualized return over the past 10 years, without even considering inflation or opportunity cost. A generation of investors who did the "right thing" have nothing to show for it. Secular bear markets tend to last a dozen years or more after a burst bubble. Etc.
Agreed, all around. But what do these sorrowful yesterdays tell us about all our tomorrows?
Ten years ago–an exceedingly poor time to buy the major indexes–the New Economy was supposed to have banished the business cycle. Now we are said to face a new normal of suppressed growth for years. Back then, we had a putative federal surplus; today, deficits look intractable. In 2000, government was deregulating and CEOs were celebrities. Not so much anymore.
Stocks this year have followed a Cycle Composite, which blends the historical presidential and 10-year cycles, plus annual seasonal tendencies.Will the pattern hold?
The public at century's turn was in lust with stock investing and ebullient about the economic future. Last month, a Newsweek cover advocated trashing the 401(k). Last week, the most-emailed wsj.com article was Arthur Laffer's op-ed piece "Tax Hikes and the 2011 Economic Collapse," a bit of alarmism anticipating disaster from what one might facetiously (but not inaccurately) call the Bush tax increases to come.
Does this mean that today's unhappy brew of worry and want should usher in an unexpectedly generous investment regime, just as the good-as-it-gets news of 2000 led to one of the stingiest market decades ever?
This is quite unlikely, mostly because equity valuations haven't cheapened nearly enough for a long string of above-average returns to ensue, and there will be no help from falling debt costs.
But it does mean that something approaching the historical market returns of the pre-bubble period has become a decent bet again. The S&P 500 is down by a quarter since 2000, while its companies' profits have doubled and long-term interest rates have been halved.
Near the recent market lows, the comprehensive Wilshire 5000 index was flirting with a trailing three-year annual total return of minus 10%. Since 1970, it has had a 10% or greater three-year annual loss three times: near the 1974 market low, at the 2002-2003 bottom and in early 2009. In the first two instances, the markets didn't quickly turn for the better as the trailing loss hit 10%. But both times, after first reaching a 10% three-year loss, the market produced a handsome annual return over the next three years—22% and 18%, respectively.
TAKING JUST A SLICE OF the bigger picture, look at the comparison of today with the 1962 market cited here two weeks ago. There was an April market top amid decent economic data in the second year of a Democratic president deeply mistrusted by the moneyed establishment. Kennedy also had committed the heresy of running the first non-war, non-recession deficit in 1961, and he would soon muscle around the steel industry. Oh, and there was a "flash crash" that May, as Jason Zweig helpfully reminded us in The Wall Street Journal—an unexplained one-day drop of 6% on massive volume.
Differences abound, of course, including the fact that the Dow had tripled in the 10 years leading to the April 1962 peak, and the market was more overvalued than it is now. The Dow, for the record, fell as much as 23% into the summer, before recovering late that year.
ALMOST NO YEAR IS "TYPICAL." But the Ned Davis Research chart here of the 2010 Cycle Composite shows that this year has been pretty close. The composite equally blends the past behavior in the second year of a presidential term, years ending in zero and the annual seasonal pattern. And we had just started to believe the news mattered.
Write to michael.santoli@barrons.com
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