Can We Rely on Stock Prices Going Back Up?

Yesterday, I came across three different articles which I thought all tied to a similar theme:  whether we should or should not rely on the idea of stock prices going up over the very long term. There were also comments on my blog this weekend along the same lines.

Regardless of what the futures holds, asking these types of questions has become much more popular because the S&P 500 is 18% lower than where it was exactly ten years ago, and the world is in the middle of a financial crisis that has yet to be sorted out.

The first article, by Felix Salmon, makes a case for reorienting expectations toward dividends rather than capital gains.

The second article, from David Leonhardt, is about why prosperity is not an unalienable right.

The last one was an interview, of sorts, with Jack Bogle advocating stocks as an asset class are attractively priced now that they are down a lot, maintaining a diversified portfolio and that the world is not ending. You may not know this, but Bogle has a pretty good track record for recognizing cheap markets and expensive ones. He says now it is cheap (this is obviously a long term opinion, not short term).

This evokes two reactions in me. The first is more of a practical idea, which is easier said than done, but saves more money. We have all read statistics about the savings rate possibly being zero or negative (the tracking of this tends to be flawed, and while I'm not sure what is accurate, it is obviously very low). There is tremendous psychological value in having savings and being a few months ahead in your checkbook. It provides a greater margin for error and a sense of accomplishment having set something meaningful aside.

The other initial reaction is a reminder that how we define retirement will have to change, if it has not already. More people will have to figure out how to derive income for longer. That could mean working longer in your career, transitioning to some sort of secondary career, monetizing a hobby, or something else.

I've written a few times about my neighbor with the backhoe, another neighbor who plows roads and driveways here in the winter and a hiking friend who has all the work she wants as a dog sitter. Someone who is 50 and has had a hobby of some sort for a while will know whether it is possible (realistically speaking) to monetize it or not. At the same time, someone who is 50 has had enough years to figure something out if they don't want to work at some store or the like.

Candidly, I am far less worried about the long term fate of the stock market versus the fate of social security and medicare. I have been writing for ages about the possibility of lower than normal returns in the US (hence the need for more foreign, in my opinion) but believe the US financial system and stock market will resume functioning. While I am no expert on social security and medicare, the numbers there make no sense to me. The worker/recipient ratio is out of whack and it stands to get worse.

As mentioned above, the S&P 500 is down 18% from ten years ago (SPX closed at 1072.32 on October 26, 1998). Ten year periods like this are not unprecedented, but are rare. Some element of looking forward and imperfect discounting still exists in how the market functions. The stock market warned of future trouble in Q4 2007 when it started to roll over. The crash now being worked through is imperfectly discounting a worsening of GDP growth and higher unemployment.

The US has encountered serious financial problems before and recovered successfully on some sort of timetable, and I believe it will do so again, even if things look different on the other side. Success must include responsibility for your own actions, like saving more, figuring a way to generate income for longer and, my favorite, living below your means. This approach can help mitigate continued bear market equity results and an altered entitlement program.

Comments

[Smarty_Pants:]

"The other initial reaction is a reminder that how we define retirement will have to change"

This statement glosses over one unspoken impact to come.

People will stay in the workforce longer, if possible, to compensate for decimated portfolios and a worthless social security system. The older workers who stay longer will continue to occupy management slots that younger workers will not be able to move into. This will block advancement for younger workers who will find it increasingly more difficult to get ahead in their career fields.

Not only will 'retirement' change, that change will also spill over into career impediments for younger workers too.

2008 Oct 27 11:45 AM

[Socialism c...:]

"Can we rely on stock prices going back up?"

No. Not until this Marxism stops. Not until the government gets its hands out of our pockets. New rumblings are of proposals to get their fingers on our 401Ks and of new Social Security taxes! When does the madness stop???

2008 Oct 27 11:58 AM

[CLH:]

You are right Roger. People will have to work longer. It has never made sense to keep a huge percentage of unproductive people around. Productive people are good for all society as well as the older people who will have something to do besides acting like children.

Jobs now are not physical and there is no reason for early retirement.

2008 Oct 27 12:48 PM

[raising4dau...:]

Roger - thanks for the good column. I got the same advice from my Depression-era grandparents for free many years ago.

The problem is that our government has refused to live below its means and has thus set a terrible example for its citizens. Run up debt. No problem. Just kick the can down the road.

The answers to our economic troubles are actually quite simple, but it involves truths that few want to hear and sacrifices that no one (from the billionaire financier to the local teacher) wants to make. That's what troubles me.

We need more engineers and fewer lawyers and social workers. We need more savings and less consumption. We need REAL health INSURANCE, not full coverage (free medical) care for some while others go without. We need for people to live in 1,000 - 2,500 sq. ft. homes rather than 5,000 sq. ft. McMansions that they can't afford.

We need a currency that's back by real, hard assets so we aren't merely trading debt.

In short, we need to rely on the advice that our grandparents (and occasionally some prophets) gave us. It's not that hard.

2008 Oct 27 02:41 PM

[John M. Lin...:]

Jobs are no longer physical my ass! Who do you think builds and maintains America? Not those that set at their desks in climate controlled office buildings . Try working outside eight hours a day year round. Retirement isn't soon enough on those below zero days! How many constructions workers are still hard at it at 65 or older? Most are worn out by then.

2008 Oct 28 11:28 AM