In his article in the January issue of Money Magazine., Michael Sivy warns that the stock market has turned a corner. Beginning in August of 1982, stock prices have been competitively bid up to record levels of price inflation, and not by a little but by a lot. Historically, price-to-dividend ratios have rarely exceeded 30:1, and then only when the stock market was about to tank. During the dot.com frenzy of the 90's, the price-to-dividend ratio rose above 75:1, with the average dividend yield on the S&P 500 dropping below 1.4%. It normally ever goes below 2.6%. Similar distortions occurred with price-to-earnings and price-to-book ratios, as investors threw caution to the wind. In early 2000, it finally caught up with us, as it always does. (I've read that when everybody is in the stock market, when the cab driver wants to talk with you about investment advice, and when financial analysts begin to suggest that it's going to be different this time because we've entered a new era of investment, we're approaching the waterfall, ripe for the plucking.)
Michael Sivy warns that although stock prices will rise into 2004, the long-term trend will be toward falling stock prices, as price-to-earnings ratios deflate over the next 13 or 14 years to 7:1, and price-to-dividend ratios shrivel toward 13:1. That's a 6:1 decline over 14 years. If you simply leave your money in the stock market, then in 13 or 14 years, after correcting for inflation, it should be worth about 1/5th what it is now. (This will be offset somewhat by earnings rising at about 1.2% per year, and it will be masked by inflation.) This is what's known in the trade as a secular bear market, even though there will be, perhaps, three or four bull markets along the way. At the end of that time, stocks will be a terrific bargain again as they were in 1982. Also, Mr. Sivy warns about the dangers of rising inflation, which the current Republican administration is courting with gay abandon. During the era from Ronald Reagan through Bill Clinton, the government worked to hold down inflation. For one thing, inflation leads to high interest rates, and high interest rates causes the national debt to mushroom because the Treasury has to pay high interest rates on its Treasury notes (in order to borrow money to pay the interest on the existing national debt.). However, the current administration seems to be willing to let the future take care of itself.
Investments in a Falling Market
Mr. Sivy suggests including some inflation hedges, such as gas and oil exploration stocks, real estate investment trusts, and mining companies in one's portfolio. (It sounds as though he sees the current administration the way I do.) This next 14 years might possibly be a replay of the 70's and 80's. It will just depend upon federal policies, and upon the fraction of investors who were around in the 70's and 80's. (The stock market is a zero-sum game. If most investors are savvy enough to recognize and outwit trends, the trends won't occur, thereby again outsmarting the multitude.)