The risks of the stock market make intermediate-term investing in equities a dicey proposition.
"Stocks are just not going to work for people," says Robert Smith, founder of Smith Affiliated Capital, a fixed-income investment management firm. "They are still too expensive and too risky in this economic climate."
Smith's chart of benchmark returns underscores the staggering realization that not a single category of stocks--except for the S&P Midcap 400 Index and the Wilshire REIT Index--have beaten the market averages since February 1999. In fact, the erosion of value over the past decade shows that the S&P 500, with income included, lost 3.44%, the Nasdaq lost 4.38%, and the Dow Jones 2.66%.
The smart money was in gold, which gained at a compound rate of return of 12.62% for the decade, and the Wilshire REIT Index, which had a small 3% compound rate of return, leveled by the past three years of huge double-digit declines.
An even more prudent comparison is with fixed-income investments where three-month Treasury bills gave investors a compound rate of return of 3.42%, intermediate governments a more solid 5.73%, and--the place to be--long-term Treasuries a wondrous 9.46% for the decade. Wow. If only we could have known.
| Qtr | 1 year | 2 years | 3 years | 5 years | 7 years | 8 years | 10 years | |
|---|---|---|---|---|---|---|---|---|
| S&P with Income | -17.41 | -43.37 | -26.11 | -15.13 | -6.65 | -3.86 | -4.58 | -3.44 |
| DOW JONES | -19.93 | -42.37 | -23.94 | -13.54 | -7.66 | -4.91 | -4.76 | -2.66 |
| DOW JONES with Income | -19.09 | -40.46 | -21.81 | -11.31 | -5.40 | -2.67 | -2.58 | -0.58 |
| NASDAQ | -10.15 | -38.83 | -23.86 | -13.89 | -6.37 | -2.40 | -4.73 | -4.38 |
| WILSHIRE 5000 | -16.45 | -44.46 | -27.64 | -16.65 | -7.09 | -2.92 | -3.62 | -2.56 |
| RUSSELL 2000 | -17.39 | -50.74 | -34.31 | -22.02 | -11.05 | -4.71 | -4.10 | -1.18 |
| S&P MID-CAP | -12.17 | -42.06 | -20.98 | -11.91 | -2.11 | 1.30 | 1.47 | 4.83 |
| MSCI EAFE | -14.22 | -50.01 | -28.81 | -15.94 | -4.59 | -0.58 | -3.28 | -2.54 |
| SPOT GOLD | 15.19 | -3.27 | 18.65 | 18.83 | 18.92 | 17.96 | 17.07 | 12.62 |
| HUI-AMEX Gold | 17.32 | -39.95 | -7.13 | -1.01 | 6.07 | 19.74 | 23.84 | 16.42 |
| WILSHIRE REIT INDEX | -24.69 | -59.76 | -45.43 | -26.74 | -8.99 | -1.41 | 0.47 | 2.96 |
| As of February 28, 2009 – Unadjusted for Risk and Taxes | ||||||||
| BC GOV/CREDIT | 2.07 | 0.66 | 4.36 | 4.70 | 3.70 | 4.94 | 5.23 | 5.57 |
| BC AGG BOND | 2.43 | 2.06 | 4.65 | 4.95 | 4.00 | 4.90 | 5.24 | 5.61 |
| BC 3 MONTH BILL | 0.03 | 1.51 | 3.25 | 3.84 | 3.27 | 2.73 | 2.85 | 3.42 |
| BC 1-3 YR.GOV | 0.84 | 3.67 | 6.24 | 5.78 | 3.90 | 3.93 | 4.34 | 4.79 |
| BC INTERM GOV | 0.80 | 5.19 | 7.97 | 7.02 | 4.67 | 5.13 | 5.41 | 5.73 |
| BC LONG TSY | -1.23 | 8.81 | 9.79 | 7.93 | 6.76 | 7.70 | 7.33 | 7.46 |
| BC US TIPS | 4.64 | -7.50 | 3.09 | 2.97 | 3.30 | 6.02 | 6.03 | 6.70 |
| BC BROAD MUNICIPAL | 5.72 | 5.18 | 1.96 | 2.95 | 3.14 | 4.22 | 4.54 | 4.61 |
| ML HIGH YIELD | 9.52 | -22.84 | -13.38 | -5.67 | -0.75 | 3.07 | 2.46 | 2.46 |
| ML GLOBAL ex US | -0.71 | -1.19 | 7.83 | 6.87 | 4.33 | 8.43 | 6.50 | 5.09 |
| BC EMERGING MKTS | 9.32 | -14.62 | -5.66 | -1.41 | 4.23 | 7.61 | 7.14 | 9.68 |
Want to sober up quickly? Smith Capital presents disturbing statistics about the valuation of stocks today. They aren't cheap despite the rallying cries of talking heads on cable television. The S&P 500 sells at 25.57 times the past 12 months of reported earnings after write-downs--some 67% greater than the average historic multiple for this broad index of 15 times.
Even at 700 the index is pricing its 500 holdings at 17.5 times projected earnings for 2009. And 2010 is unlikely to see much of an increase if any in corporate earnings as home prices are not expected to stabilize until mid-2010 at the very earliest. So the bottom ain't with us now even though many financial experts are sure many stocks are selling well below their intrinsic value.
Dupont
This year promises to weigh down the S&P 500's compound annual rate of return for the past 10 years that was 3.44%. The requirements of U.S. pension funds cannot take the risk of the market's volatility. Endowments that have been chasing private equity, hedge funds, real estate and venture capital but don't own Treasuries had precisely the wrong asset allocations.
The significance of fixed income can be seen in another Smith chart, which underscores the impossibility of even having a positive rate of return unless you were 40% bonds. At 20% stocks and 80% bonds, you could have made a compound rate of return of 3.94% or almost or twice as good as 100% stocks for the period.
Smith wonders if stocks can return to their former popularity. He has measured the risks from volatility in the market and concludes that "no efficient frontier exists out to 20 years" to be able to predict that the returns on stocks adjusted for volatility and risk, can turn in steady positive returns in a period of deflation.
Reading between the lines, Smith is raising an almost taboo subject on Wall Street: Should investors shun common stocks as weapons of mass destruction? It's a question that's going to elevate in the public's consciousness as prices tumble further to unimaginable levels and investors get worn out trying to guess the bottom.
Even the kingpin of common stocks, Berkshire Hathaway's
His major warning is to get out of long-term Treasuries before the bubble bursts. "Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long," he warns. Big time.
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