Buy Stocks Now -- and Hold Them
Scared of stocks? Who can blame you? Standard & Poor's 500-stock index lost a staggering 55% from October 9, 2007, through March 9 of this year -- the worst bear-market loss since the Great Depression. Foreign stocks got hammered even harder. Bonds -- except for Treasury IOUs -- suffered, too.
But as surely as sunrise follows night, bull markets follow bear markets. Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School and one of the nation's best-known market historians, thinks that a bull market has already begun -- and that it will be a dandy. (Siegel also writes a column for Kiplinger's Personal Finance.) Indeed, the S&P 500 soared 36% from March 9 through June 26.
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Over the next ten years, Siegel predicts, the market will return roughly 8% annualized -- after inflation. If Siegel is right and consumer prices rise 3% a year, as they have over the long haul, U.S. stocks will deliver double-digit returns -- not every year, but on average -- over the next decade.
Shorter term, Siegel thinks the S&P 500 could easily return 10% to 12% this year (year-to-date through June 26, the index gained 3.1%; Kiplinger's forecasts a return of 5% to 8% in 2009). He's also bullish on high-yield "junk" bonds, even though they have rallied strongly this year after tumbling in 2008.
Making predictions about short-term market moves is extremely hazardous, as Siegel well knows. Like me, he failed to predict the collapse in the financial system last September and its impact on the markets. "I didn't see the balance sheets of these banks and investment banks," Siegel says. "I didn't realize they held so many subprime mortgages."
What's behind his long-term forecast? In studying stock-market performance since 1802, Siegel discovered remarkably consistent after-inflation returns of 6.5% to 7% annualized over different 20-year periods. He also found roughly the same results in Great Britain, Germany and Japan.
If Siegel is right, investors will do far better than they have during the century's wretched opening decade. Most have lost money since stocks peaked in March 2000 -- a period of more than nine years. Losing money in stocks over such a lengthy span is a fairly rare occurrence. "In the long run, stocks do tend to revert to the mean," Siegel says.
Protracted periods of pathetic performance, Siegel says, have usually presaged outsize bull markets. After the Depression, stocks produced superior returns until the late 1960s. Starting in 1982, stocks did far better than their long-term average until early 2000. Says Siegel: "The more the stock market goes down, the better the deal. Selling because the market has gone down is the dumbest of all reasons." Siegel's current bullishness stems mainly from the market's poor results this decade.
What's different this time from past bear-market troughs? "People say the market is still not cheap," Siegel notes. After all, average price-earnings ratios dropped into single digits by 1982. Today, the S&P 500's P/E (based on operating earnings) is 21 -- slightly above its historical average of 19. Siegel counters that ten-year Treasury bond yields peaked at 15% in 1981. Today, they're less than 4%. Moreover, the market's current P/E is bloated because the recession has depressed profits.
"Tell me what investment will do better than stocks today," Siegel says. "Real estate is in the doghouse. Commodities aren't cheap. Bonds, except for junk bonds, are overpriced. Treasury bonds are ridiculously overpriced."
But isn't the economy weaker now? What about the trade deficit, the federal deficit, the troubled banks, the overextended U.S. consumer? Siegel acknowledges the economy's problems, but he says that the nation has gone through similarly tough times before -- and still stocks have churned out long-term returns of 10%.
At any rate, Siegel thinks the economy has probably turned up already: "We're going to have a faster recovery in the second half of the year than most people think. The upward slope on the V will not be as steep as usual, but we're not going to have an L-shaped economy, either." (Most economists expect a sluggish recovery.) Siegel allows, however, that the unemployment rate may continue to rise for another 12 to 18 months.
For investors with ten or more years to go before they need their money, Siegel suggests a portfolio of roughly 75% stocks and 25% junk bonds. He'd put close to half the stock money overseas, with a big chunk in emerging markets. "We have to be outward-looking. There are huge, growing consumer markets outside the U.S." Population growth in the U.S. and other developed nations, meanwhile, is slowing.
I think Siegel is on solid ground with his long-term predictions. Long-term market returns have been remarkably consistent, as he demonstrated in his groundbreaking book Stocks for the Long Run. And those returns came in spite of dislocations far worse than the sort that we're experiencing today -- including world wars, a civil war, hyper-inflation, shuttered stock markets and depressions.
Steven T. Goldberg (bio) is an investment adviser.