A Stock Market
It's now been nine months since I first examined the stock market this year. Let's see what's happened.
In April, The Dow-Jones index stood at 10,200.
Today, it closed at 8,433,
while the S&P 500 ended today at 889.
Earnings: January, 2002 forecast
In the January, 2002, issue of Money magazine, the earnings forecast on the S&P 500 was
$52 a share for 2002 , with
$58 on tap for 2003, and
$64 for 2004.
Earnings: December, 2002, reality
Today (Money magazine, December, 2002), the reality is
$48 a share for 2002, with Dr. Edward Yardeni projecting,
$54 a share for 2003, and (my guess),
$60 a share for 2004.
. Dr. Yardeni projects 900 for the S&P this month, corresponding to a price-to-earnings ratio of about 18, He is prognosticating a value as high as 1100 by next June, leading to a P/E ratio of about 21. (Paradoxically, Michael Sivy pegs the current P/E ratio on the S&P 500 at 28-to-1, implying earnings of about $32 a share. I have no idea how he arrives at that number.)
These are the optimistic forecasts. The pessimistic horoscopes call for a double-dip recession next year, and the Dow to fall until it reaches fair value at 3,000 to 5,000.... not a happy prospect.
One concern I have is geopolitical With the Bush administration abdicating diplomacy in favor of open aggression, the effects upon the stock market could be unpredictable. U. S. goods and services might be in less demand outside the United States than they've been in the past. I have no way of assessing this, but it would seem to be something to consider.
Eleven months ago, Michael Sivy's concern was about rising inflation. Instead, inflation has fallen, along with interest rates. If we haven't experienced a double-dip recession, we're at least skirting it. In the meantime, the economy is, seemingly, slowly recovering. Profits this year have been "very disappointing", remaining flat with last year.
In a companion article, "Uncertainty Rules", Lou Dobbs quotes a bear (Goldman Sachs' William Dudley) and a bull (Prudential's Edward Yardeni).
William Dudley anticipates low earnings for some time to come, with the economy teeterin gon the edge of recession.
Turning to Dr. Yardeni's more optimistic scenario, suppose that earnings rise to
$54 a share in 2003, and to
$60 a share by December, 2004.
S&P = 1200 to 1250 by 2004?
In that case, using Dr. Yardeni's 1100 for the June, 2003, S&P 500 as a yardstick, we might expect an S&P 500 index of 1200 to 1250 by December, 2004.
Correcting for inflation, that would be equivalent to about 1140 to 1190 on today's scale, or about 1070 to 1115 corrected to the numbers in early 2000... not much reward for the risk involved.
This is probably a best-case scenario. Dr. Yardeni observes that there's no doubt that we can win the war with Iraq, but can we win the peace? He thinks that a victory over Iraq may either stabilize or de-stabilize the region.
Dr. Yardeni also notes that there "are still many investors who are worried about the quality of corporate earnings. 'There's a lot of controversy about how we measure corporate earnings, he says."
Lou Dobbs concludes his article with,
"If a possible war with Iraq goes well... If corporate earnings finally show significant gains... If investor confidence in corporate leadership recovers... With so many questions still unanswered, it's not likely that uncertainty in the markets will be resolved anytime soon."
One factor in all this is the fact that people are still channeling money into their retirement accounts every month. Money magazine is telling them that bonds are bad right now, and stocks are much better investments at this stage of the business cycle. (The time to buy is when everyone else is pessimistic, and the time to sell is when everyone else is optimistic.)
Comparing January, 2002, forecasts with December, 2002, realities
It's interesting to review what the experts predicted for 2002 back in May of this year (Wandering Down Wall Street). One seer forecast a Dow of 12,000 for now. As I mentioned above, it closed this weekend at 8,433... not quite 12,000.
One interesting factoid: most of the money that the shareholder has made over the preceding decades has been in the form of dividends. But Michael Sivy places the current dividend yield on the S&P 500 at 1.7%, up from 1.2% in early 2000. This compares to 3% to 7% in the past.
Skinning the Suckers
The U. S. public has lost a fraction of its retirement savings in the dot.com meltdown. How much? Well, it would be the difference between what they originally invested and what they have left today. Where has this money gone? Someone sold everything they were buying in the 90's, and someone has been buying everything they're been selling over the past not-quite-three years. Has someone made money out of the dot.com bust?
In the meantime, what has become of Kenneth Lay, the former Enron CEO who bought the 90+ million dollar home in the state of Washington? The average family donated more than $1 to the purchase Mr. Lay's house. What about the other executives of Enron, Worldcom, and Global Crossing? Did someone say to them, 'We appreciate your campaign contributions. Just keep a low profile, and in a few years, the public will have forgotten all about Enron, Worldcom, and Global Crossing?"
Have marketeers worked out a table relating how long it takes for the public to forget about an issue as a function of its level of significance?
As I've mentioned in previous "columns", many investors transferred their remaining money to bond purchases, a move that may lead to new meltdown when interest rates start back up. Only the unexpected weakness of the economy has insulated them from this awful truth.
How many such losses will be needed to educate the U. S. public into a distrust of the financial markets? In the past, it's happened about once to every generation. The Crash of '29 and the run on the banks led people to save their money in socks under their mattresses. The 1968-to-1982 super-bear market chased a lot of amateur investors away from the stock market.
As I've also mentioned, the U. S. stock market rises at an underlying rate that reflects the gradual rise in national productivity. All the rest of the sound and fury is smoke and mirrors. The article of faith that equities outpace other investments is presumably true, but the way to play it has been to buy Vanguard index funds (since they have the lowest expense ratios of any index funds). Also, this long-term rate of return is an order of magnitude lower than the annual returns of the '90's.