SPECIAL REPORT: INVESTING IN THE ‘90s : U.S. STOCKS : And When the Bear Stops Hibernating?
The challenge for investors in U.S. stocks today is to meld two seemingly incompatible strategies: getting ready for the next bear market and looking beyond it.
The looking-beyond part appears easy, of course. “I’m a long-term investor” has been the mantra of individuals who have poured record sums into stock mutual funds since 1991.
But the conviction of this decade’s multitude of new investors has yet to be tested in an extreme bear market. When that time comes--and it will--the emotions will be the same whether you have $500 or $50,000 invested: Most will find it extraordinarily tough to keep looking ahead.
Why worry about a bear market now? After all, short-term interest rates are still at 30-year lows. Inflation is down. The economy is recovering, albeit slowly. Corporate profits and dividends are rising.
What investors forget, however, is how long those positives have been pushing stocks up.
Bull markets have finite life spans, and the average length of the 24 bull markets since 1897 has been 32.7 months, notes Dan Sullivan, who writes the Chartist market newsletter in Seal Beach.
The current bull run began in October, 1990, which makes it nearly 31 months old--a mature bull at the very least.
Contrary to popular belief, you don’t need a recession to cause a bear market; they often occur independent of each other. More typically, bull markets end when investors essentially decide that they have priced stocks to reflect every last bit of good news about falling interest rates and rising corporate earnings.
Could that be the case today? Interest rates certainly could go lower, but there is an equal--if not better--chance that they eventually will rise with an improving economy, many market pros say.
As for earnings, Wall Street already has a massive bet on better numbers this year and next: The Standard & Poor’s 500-stock index is up about 48% from its 1990 low. Yet the total earnings of S&P; 500 companies--even after adjusting for one-time write-offs--were just 1% higher last year than in 1990.
As a result, U.S. stock prices today are as high as they’ve ever been relative to earnings per share.
That means there’s little room for disappointment--at a time when the market is just beginning to deal with the higher tax rates and other economic costs of President Clinton’s proposed shave-the-deficit program.
There are, naturally, many veteran investors who believe that the naysayers are falling over themselves looking for trouble where it doesn’t exist.
Ken Fisher--whose Fisher Investments Inc. of Woodside, Calif., manages $800 million for clients--argues that there are few of the excesses around that normally herald the end of a bull run. Interest rates aren’t excessively high, the economy isn’t burdened by excessive demand or excessive supply, and even the worrisome political excesses--an activist White House--are less of a threat than imagined, he says.
“Historically, it’s very hard to find a bear market at times like these,” Fisher contends. But he also admits that while he’s still bullish, he’s less so than he was last year or the year before.
For argument’s sake, let’s assume you accept the idea that a bear market is coming later this year or in 1994. So what, you say. You’re buying stocks or stock funds to hold for the next 20 years, and you know that over the long haul stocks typically return 10% to 12% a year--better than any other financial investment.
Fair enough. But would you really be willing to sit tight through a horrendous downturn?
The last two bear markets were mercifully short, as measured by the Dow Jones industrial average. The 1990 bear lasted just 2.9 months, slicing 21.1% from the Dow. The 1987 bear was over in 1.9 months; its 36.1% decline occurred largely in one day.
But those were unusual. Sullivan’s tally of the 24 bear markets since 1897 shows that the average one lasted 14.5 months and cut 34.1% from the Dow.
James Stack, publisher of the InvesTech market letter in Whitefish, Mont., believes that U.S. investors by and large are unprepared for a traditional bear market because it has been so long since they’ve seen one. If Japan’s recent three-year ursine experience is any guide, too many discouraged investors will be selling at the market bottom instead of buying.
Now that you’re forewarned, however, let’s assume you are a bona fide long-term investor and that you can afford to hold your stocks through the next bear market--no matter how brutal. Let’s also assume that you have smartly adopted a disciplined investment program, so that you’re putting small sums of money into the market every month or so, rather than trying to time price swings.
With that kind of plan, what else can you do to improve your odds of making decent money in U.S. stocks by the year 2000?
* First, have confidence, says Fisher. While popular wisdom says the nation is doomed to slow growth this decade--and low stock returns--Fisher isn’t so sure.
“This is the best demographic decade of the 20th Century,” he argues. Why? “Because we will tilt (in population) more than ever before toward people of working age--the 45-to-54 age group, who have the highest per capita income growth of any age group.”
Those also happen to be most people’s most productive years, Fisher adds. If that translates into greater business success, as it should, U.S. stocks’ potential may be vastly underestimated.
* Second, diversify as much as you can manage. Even if you invest via mutual funds, don’t pack all of your assets into one fund.
For example, no one can predict whether smaller stocks will continue to outpace blue chips--so why not invest in a small-stock fund and a blue chip fund?
Likewise, many pros believe that industrial and technology stocks hold the best promise for the next few years because of the growth in business spending worldwide on machinery and other productivity-enhancing equipment.
Yet many consumer stocks--such as drug issues--may now be major bargains after having been slammed this year on worries about slow consumer spending.
The solution? If you ask mutual fund companies for funds that have healthy representations of stocks in those two sectors, you can bet on both. The more diversified you are, the more confident you should feel about your nest egg.
Investing wisely in U.S. stocks will take more thought--and staying power--in the ‘90s than in the wildly bullish ‘80s. But in the sweep of market history, the ‘80s were the aberration. Investing was never supposed to be that easy.
When the Bear Awakens
How much can you afford to lose in the stock market? Here are the percentage declines in the Dow Jones Industrial Average in each of the past 10 bear markets. Bear markets (peak to trough): 1/53 to 9/53: -13.0% 4/56 to 10/57: -19.4% 12/61 to 6/62: -27.1% 2/66 to 10/66: -25.2% 12/68 to 5/70: -35.9% 1/73 to 12/74: -45.1% 9/76 to 02/78: -26.9% 4/81 to 8/82: -24.1% 8/87 to 10/87: -36.1% 7/90 to 10/90: -21.1% Source: The Chartist newsletter
Where to Get Help
Eager to get started in mutual funds, or to add some variety to your portfolio? Here are some potential sources of help:
* The 1993 Directory of Mutual Funds published by the funds’ chief trade group, the Investment Company Institute, includes phone numbers, asset size and minimum investment requirements for virtually every fund--3,700 in all. It does not, however, include performance statistics. Cost is $5. Send check, payable to ICI, to: Gretchen Bach, Investment Company Institute, P.O. Box 66140, Washington, D.C., 20035-6140.
* Morningstar Inc., a well-respected independent research group, provides rankings and detailed performance statistics on 1,240 funds. Updates are mailed every two weeks. A three-month trial subscription costs $55. Call 1-800-876-5005.
If you have a home computer and subscribe to an on-line database service, you may be able to get fund information directly. CompuServe, for example, offers Money magazine’s mutual fund ratings as part of its basic service.
