There's Precedent for Stagnant Markets

Includes: DIA, QQQ, SPY
by: Lawrence York

We began 2007 with S&P 500 companies forecasting earnings growth of +9.4% from a year earlier. This week, as fourth quarter earnings releases roll out, the revised estimates for companies is for a 6% decline in earnings instead of a gain, according to Standard & Poors. Barron’s, in their article titled: “It’s Time to Buy,” published on July 2007, forecast a 15.2% return for the S&P for the full year 2007 yet the market has been falling ever since. It actually went on to lose 4.3% since Barron’s call back in July, and an additional 5.6% as of yesterday for an alarming 10.3% decline since July 2007. Indeed the markets have begun 2008 continuing to sell-off, such that all broad market indices have fallen through their support bands like a falling knife trying to hit the floor. Now it seems highly unlikely, given the financial mess the U.S is in, that the 15.5% forecast by S&P 500 companies for their 2008 earnings growth can be near their targets.

The fact is that no one can reliably predict what will happen with earnings or the markets with any consistent reliability, but the facts also are that you don’t try to catch a falling knife. We have already stated that a return to the average Price Earnings Ratio means a much lower market and has pegged the index floors at their significant support levels. (Read: Is it time to bottom fish? And Dow 10,000?).

Investors must consider that there is huge precedent for stagnant markets, looking at 20 year market cycles going back over 100 years of market history. In 1962, the Dow Jones was at the 1,000 level and in 1982 it was still at the 1,000 level. Since then the market has skyrocketed fourteen fold and has begun the 21st Century seeming to repeat this twenty year cycle. If it is so, then one must be proactive in the market and utilize risk management techniques to preserve corpus. Buy & Hold, by definition only guarantees average returns. But that’s only if you can stomach the volatility. Readers, we have great economic and political uncertainty and that means greater volatility. Your investment strategy must take advantage of what is, not what you wish it to be.