Many investors are angry, frustrated and disillusioned with stocks. Anecdotal evidence suggests that some people have decided to swear off stocks forever. Others may be wondering how much more pain they can endure before they also bail out. Those reactions to the bear market are no surprise.
But if you've already sold all of your stocks, please reconsider. And if you're thinking of jumping ship, stay onboard. No one knows what the stock market will do tomorrow or over the next few weeks and months. But with the market at such low levels, the opportunities are far greater than the risks.
| Row 0 - Cell 0 | The No-Stock Portfolio |
| Row 1 - Cell 0 | Investing Outlook 2009 |
Kiplinger's forecasts that U.S. stocks will return 5% to 8% in the coming year (see Outlook 2009). In my view, there's a decent chance that stocks will be considerably higher a year from now. Here are six reasons you should hang on to (or boost) your stock holdings.
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1. Stocks are battered and cheap. Between its peak on October 9, 2007, and its low on November 20, 2008, Standard & Poor's 500-stock index plunged 52%. That makes this bear market the worst since the Great Depression (through December 12, the S&P was 44% below its high).
In my view, we've been punished enough for our excesses of speculation and imprudent borrowing. That's another way of saying the market has already discounted the current recession -- and then some.
On the surface, the market doesn't look all that cheap. The S&P 500 trades at 19 times the past four quarters' earnings. But those earnings numbers are depressed by write-offs at financial companies.
The Leuthold Group, a Minneapolis investment-research firm, calculates price-earnings ratios using "normalized" earnings (Leuthold defines normalized as average annual earnings over five years). At the market's November 20 low, says Leuthold, the S&P 500's P/E of 10.4 on normalized five-year earnings was in the bottom 10% of P/Es over the past 52 years. That is cheap, and the market hasn't gotten that much more expensive since.
2. Stocks are overdue. Let's not forget that the current bear market is the second megacollapse of this decade. From December 31, 1999, through December 11, 2008, the S&P 500 produced an annualized return of -4.0% (if you invested $10,000 in an S&P 500 index fund at the start of 2000, the fund would be worth roughly $6,960 today).
The index's worst ten-year period since 1926 was an annualized loss of 0.9%. According to Leuthold, the median ten-year annualized return is 11.1%; that means half the returns were above that figure and half were below. After nine years of pitiful performance, stocks are due for a period of solid gains.
3. The low-risk alternatives are pathetic. Yes, we all know the old Will Rogers line that you should be more concerned about return of investment than return on investment. But will you really be satisfied with a ten-year Treasury note that pays a mere 2.5% (or a T-bill that yields virtually nothing)? It won't take much for stocks outpace the risk-free alternatives.
4. It's not the 1930s. Yes, the economy stinks. Joblessness is up, a growing number of companies are filing for bankruptcy, and consumer spending and sentiment are in the tank. But the economy is nowhere near a depression, which by one popular definition is a decline in real growth of at least 10%.
And we won't have a depression because central banks everywhere are working feverishly to flood their economies with money and because governments are spending like drunken sailors. (The Federal Reserve's decision December 16 to cut short-term interest rates to just above 0% underscores the Fed's committment to revive the economy). Add the benefits of lower gasoline prices, which are like a gigantic tax cut, and mortgage rates that could approach 4% in the U.S. These are ingredients not just for preventing a depression but also for spurring an economic surprise to the upside.
5. The market shows signs that the worst is over. Between November 20 and December 15, both the S&P 500 and the Dow Jones industrial average climbed 11 of 16 trading sessions. Perhaps more significantly, the stock market has risen on days when the news has been awful -- for example, on December 5, when the government reported that the number of jobs lost in November was the highest since December 1974, and on December 12, the day after authorities accused Wall Street legend Bernard Madoff of orchestrating a fraudulent investment scheme that could cost his clients as much as $50 billion.
6. If not now, when? Say you've sold a bunch of stocks and plan to reenter the market when things look better. Or perhaps you have inherited some money and are waiting for the "right time" to put it to work. The chances that you'll nail the right time -- or come anywhere near it -- are slim.
Why? Bear markets almost always end in an atmosphere of deep gloom, and stocks start going up well before the economy bottoms. For instance, the month with the previous record for most jobs lost was December 1974. The horrific 1973-74 bear market bottomed in October '74. But most people are constitutionally incapable of pulling the "buy" trigger when the news is unfailingly bleak.
If you wait for the news to get better, however, you'll almost certainly miss the initial leg of the next bull market. And the early moves are typically fast and furious. T. Rowe Price, the fund company, looked at returns of the S&P 500 following each decline of at least 20%. In those six instances (not counting the current bear market), the S&P has been up an average of 31% in the subsequent year. The lesson: Not owning stocks can also cost you dearly.
If you're still not convinced, see our No-Stock Portfolio.
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