Hang on to Your Stocks
When will our financial nightmare end? When will the economy hit bottom and start to grow again, however slowly? And when will stocks begin a sustainable bull market following their worst decade on record?
My advice to investors: "Hang in there." I see no reason why over long periods of time the stock market won't continue to generate the 9% to 10% annualized returns it has produced since 1926.
Shorter term, I'm mildly bullish -- but plenty nervous. In the past several days, I've talked with two fund managers with outstanding long-term records who happen to be among the best big-picture thinkers I know.
Turns out they disagree on virtually everything. Kathleen Gaffney is co-manager of Loomis Sayles Bond (symbol LSBRX), my favorite taxable bond fund (for investors with some tolerance for above-average volatility). Although it boasts a fine long-term record, Loomis Sayles has performed horribly of late, plunging 18.5% over the past year through April 17.
Rudolph-Riad Younes is co-manager of Artio International Equity II (JETAX), which, like Loomis Sayles Bond, is a member of the Kiplinger 25. An older fund, Artio International Equity (BJBIX), has a terrific long-term record, although it lost 46% over the past year, trailing its benchmark by two percentage points. International Equity II was launched in 2005.
Younes is short-term bullish, but he likens the economy and the market to a binge eater feeling a "sugar rush." In his view, various federal stimulus programs will boost the economy, the banking system and the markets in the short run, but things will fall apart again as soon as the buzz wears off.
Younes's fund holds almost no cash. But it has substantial positions in futures contracts and exchange-traded funds. These instruments give the fund exposure to foreign stock markets, but allow Younes to reduce his positions quickly if he senses things are turning sour again. Says Younes: "With almost zero interest rates everywhere, the opportunity costs of being out of the market are very high. As soon as the markets stabilize, suddenly you look like an idiot if you're out of the market."
Younes thinks U.S. policymakers are on the wrong track. Rather than investing in long-term projects and encouraging consumers to save, politicians are throwing trillions of dollars at the economy and the banks in hopes of surviving the next election.
All of this will end badly, Younes believes: "The question is how soon things will get worse. You're treating a terminally ill patient with the wrong medicine. It could be next year or the year after. We don't know when we'll hit the wall." The only comfort Younes offers investors: He doesn't think the Dow Jones industrial average will fall below its March 9 low of 6547.
Loomis Sayles bets on high-grade bonds
Gaffney thinks investors will face a long, slow grind this year. Even in her personal accounts, she doesn't own any stocks. "It's too early," she says. "This year is a year of repair, not recovery."
As for the recent boomlet of encouraging economic data, she says, "In 2009, things will seem like they're getting better, and then we'll hit another air pocket." She thinks the stock market won't bottom until the third quarter, and the economy will begin an anemic recovery in early 2010.
Gaffney sees the best opportunities in investment-grade corporate bonds: "You can find some opportunities in high-yield bonds, but the sweet part of the market is investment grade."
She and lead manager Dan Fuss are also keeping more of their fund's assets in dollars than usual. They like emerging markets long term, but most of their foreign currency today is in safer havens such as bonds from Canada, New Zealand and Australia. Loomis Sayles Bond currently yields a sweet 9.7%.
As for the policymakers in Washington, says Gaffney, "the actions they've taken are in the right direction. They have a sense of what needs to be done. They've pulled out all the stops."
Because of the massive stimulus, she thinks the U.S. economy will crawl out of the morass much faster than the rest of the developed world. Other developed nations, she says, "aren't providing the necessary stimulus."
What should you make of these two sharply conflicting points of view? I think the clear message is not to put too much faith in what any of the experts say -- ever. Economics isn't a hard science, and market forecasting is practically akin to fortune telling. The pundits simply don't know all that much, especially in today's unfamiliar environment.
What we do know is that shareholders have always done well over the long term. As the late mutual fund pioneer John Templeton said, "The most dangerous four words in investing are 'This time is different.' "
Steven T. Goldberg (bio) is an investment adviser.