One of my family's favorite Broadway musicals is "Chicago." And, while that Broadway hit has a lot of great songs in it, none are more memorable than "Mister Cellophane." That toe-tapping song stays with you-or I should say will haunt you-for the weeks and months that follow, as you simply can't get it out of your head.
In many respects, our stock market in 2011 is setting up to be a "Mister Cellophane" market. For any of you that didn't see the hit musical "Chicago," the lyrics to the song "Mister Cellophane" go like this: "Mister Cellophane should have been my name, Mister Cellophane, 'cause you can look right through me, walk right by me, and never know I'm there..."
I'm afraid that most investors are indeed walking right by our stock market like it isn't even there. To make my point, I'm going to look at four things: equity fund flows, equity market historical returns, dividends, and sector weights. And, to put a little icing on the cake with this commentary, I'm going to close it with my official call for the Dow for 2011. Let's begin with equity fund flows.
The easiest way for me to prove this "Mister Cellophane" point is to look no further than the most recent fund flow data from the ICI (Investment Company Institute). The ICI tracks the net equity flows for the entire mutual fund industry. Before I show you how the average investor is looking right past our equity market, I want to give you some frame of reference. A little more than a decade ago (in 1999), when everyone wanted to own stocks, net flows into stock mutual funds were +$179.3 billion. The following year, net flows into stock mutual funds ballooned to +$257.9 billion because everyone-even the taxi driver and bartender-was buying stocks.
The last two years tell quite a different story. In 2009, net flows into stock mutual funds were -$39.5 billion-that means more money went out of stock funds than went into stock funds in 2009. That trend got even worse in 2010, when the net flows were -$71.0 billion. Someone far smarter than I once said, "Be fearful when others are greedy, and be greedy when others are fearful." Well, I can sum up 1999 and 2000 as a time when most investors were greedy-it would have been prudent to have been fearful of equities back then. Meanwhile, 2009 and 2010 show us a completely different story, as investors are now fearful of equities. Maybe now would be the prudent time to be greedy and buy some equities. Oh, in case you forgot who uttered that now famous advice, "Be fearful when others are greedy, and be greedy when others are fearful," it was none other than legendary investor Warren Buffett.
Let's move on to my second point: equity market historical returns. As a Wall Street strategist, I love the month of January, as it's always a time to reflect. As a student of history, I love to reflect on what history is trying to tell us. I looked at the total return history for the S&P 500 Index1 during each of the past 80 years, and I classified these total returns into six separate distribution categories based on the ranges of returns.
80 Years of Stock Market Returns Distribution of S&P 500 Index Total Returns by Calendar Year (12/31/1930 - 12/31/2010)
100%
The distribution of stock market returns among the six categories (please see above) might surprise you. During the past 80 years, the market returned +10% or more 56.25% of the time. The market also posted positive returns in 58 of the past 80 years-that's an almost unbelievable 72.5% of the time! Meanwhile, the stock market produced negative returns during only 22 of those 80 years. This means that from 1931 to 2010, our market lost money only 27.5% of the time.
So, what do I think the market will return in 2011? You're going to have to read on, as I'll close this commentary with my 2011 market forecast. Before I move on, I discovered another very interesting trend over this 80-year period. In category one above (years that posted returns of +20% or more), there were only five occasions in which these returns of +20% or greater occurred in back-to-back years. This happened between 1935 and 1936, 1942 and 1943, 1954 and 1955, and 1975 and 1976 (please see below). In the 1990s, it happened in back-to-back-to-back-to-back years! That's right-our stock market returned +20% or more for five consecutive years: 1995, 1996, 1997, 1998 and 1999. How did we all not see the stock market crash and correction coming in 2000?
Back-to-Back Years of Stock Market Returns of +20% or Greater Calendar Year Total Returns S&P 500 Index (1930 - 2010)
Years of Back-to-Back Market Returns of > +20%
Let me shift gears from that brief history lesson, and move on to my third point: dividends. Even though corporate America has been on an impressive run creating corporate profits, hoarding cash, and strengthening their balance sheets, they've been slow to give that money back to its rightful owner: you, the shareholder. What that means to me is that we still have some upside in 2011 for dividend increases and dividend initiations.
In 2010, there were $20 billion of positive dividend actions (dividend increases and dividend initiations), and only $400 million worth of negative dividend actions (dividend decreases or dividend suspensions). All told, for 2010, if we look at the 500 companies that comprise the S&P 500, they paid $200 billion in dividends. While this is a slight increase over the 2009 level of $196 billion, it remains a far cry from where we were four short years ago. In 2006, those 500 paid out $225 billion in dividends. In 2007 they topped that by paying out $247 billion. In 2008, they matched that record $247 billion payout. The trend is our friend on this one, as I believe that dividend payouts are heading back up to that $250 billion range. If I'm correct, that's an additional $50 billion of dividends for this year. A few billion here, a few billion there...before you know it, it all adds up to real money.
Now for my fourth and final point, sector weights (one of my favorite overall stock market indicators). Sector weights will give you a good idea about the diversification -or possible excess, or potential bubbles-in our market. Remember that there are 10 different sectors that comprise the S&P 500 Index: consumer discretionary, industrials, materials, energy, telecommunications, consumer staples, financials, technology, utilities, and health care.
Today, I love what I see in terms of sector weights and exposure. Technology accounts for 19%, followed by financials at 16%, and energy at 12%. This all makes perfect sense to me with a booming global economy-technology, energy, and financials should have a major weighting.
Let me give you one more history lesson to show you what you don't want to see in terms of sector weights. Back in 1999, technology accounted for an unheard-of 29% of our stock market. And, if you added telecommunications to that, which was 8%, that meant that T&T (Technology & Telecommunications) accounted for more than 1/3 of our market at 37%. How do you spell tech bubble? One other sign that things were out of whack back in 1999 had to do with the global economy booming-energy only accounted for 6% of our stock market.
Back again to where we are today. Health care, consumer staples, consumer discretionary, and industrials all comprise a double-digit piece of our market weight with each weighing in at 11%. Like I said, this might just be the best diversification of our market-sector weights in my 33-year career.
Let me bring this commentary to a close with my market forecast for the Dow2 for 2011. Before I give you the number that may shock you, I'm going to give you the reasons: The global economy is booming, corporate America is flush with cash and will soon be increasing dividends, equities remain an unwanted asset class, the housing market has stabilized, the sovereign debt crisis is more behind us than in front of us, and last but not least, it's earnings, earnings, and even more earnings. Companies are lean and mean, and the global economy is booming. I expect corporate profits to hit record highs, which means the Dow could hit a record high as well.
For 2011, I believe that the Dow will be up double digits, and the first digit will be a "2." Let's do the math. The Dow ended the year at 11,578, which means a +20% return would put the Dow at 13,893. So I'm going to round things up and make my official forecast for a Dow 14,000!
If I'm right and we get to 14,000, we're only one good day away from reaching the all-time record high for the Dow. Remember, the Dow's all-time high was 14,164.53 on October 9, 2007. There's a good chance we'll get there sometime in 2011.
You might be wondering just how I did with my forecast in 2010. Well, I was calling for a Dow at 12,000. So, on the one hand, I guess I was wrong, as the Dow closed the year a few hundred points shy of 12,000 at 11,578. However, on the other hand, with the Super Bowl only two weeks away, maybe now would be a good time to remind you of my favorite Vince Lombardi quote. After all, the Super Bowl trophy is named after this legendary Green Bay Packers coach, as it's called, "The Lombardi Trophy." Anyway, here's the quote: "We didn't lose the game; we just ran out of time." Me too-my Dow forecast for 2010 wasn't wrong, I just ran out of time ;-)
Let's end this commentary where I began. Sing along with me now, as I know you want to: "Mister Cellophane, should have been my name, Mister Cellophane, 'cause you can look right through me, walk right by me, and never know I'm there…" SEE YA AT 14,000!
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