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Year-End Review Of Markets & Finance 2008: After The Collapse, Guarded Hope For '09 2009 年 01 月 02 日 16:41After the stock market's third-worst year in more than a century, many investors are angry and confused. They are hoping for a turnaround in 2009, but considering the pain that has continued for more than a year, they are reluctant to bet on it. At a time when some stock prognosticators are telling people that stocks are cheap and it is time to buy, many investors have developed a 'show me' attitude. Their most basic beliefs about stocks have been shaken, notably the idea that buying and holding is smart and that stocks will outgain other assets over time. Over the past 10 years, stocks as a broad group are down, and their performance trails that of almost every other asset class, including government bonds, gold and even real estate, according to data from Morningstar Inc. So while people hear the advice that it is time to buy stocks, they have trouble following it. In fact, professional and amateur investors alike are reluctant to buy anything that smacks of risk. That helps explain the current demand for the investment perceived as the world's safest, U.S. Treasury bonds, and the steady withdrawal of money from stock-focused mutual funds. The problem isn't just that major institutions including Bear Stearns, American International Group and Fannie Mae collapsed and had to be rescued. It isn't just that the Dow Jones Industrial Average finished the year at 8776.39, down 4,488.43 points or 33.8% in 2008 and 38% below its October 2007 record. It was the Dow's worst year since 1931. The broad Standard & Poor's 500-stock index did even worse, down 38.5% for 2008, its worst year since 1937. A big part of the problem is that each government effort to plug the market's holes has seemed inadequate, and both stock rallies and investor hopes have repeatedly run out of steam. Given that the economy could be weak for months to come, that financial institutions and ordinary people alike are borrowing less and holding fewer risky securities, and that the banking system and housing market show little sign of returning to normal, it is little wonder that stocks are struggling. At some point, experts agree, the stock market will hit bottom and move higher. Some people believe it happened in November, when stocks hit multiyear lows and then began an upswing. Others think stocks will sag again and won't bottom out until later, perhaps some time in 2009. No matter what they believe, few people want to make big bets right now. Last month, Cleveland's Key Private Bank, an arm of KeyCorp, recommended that clients move about 5% of their portfolios out of their cash reserve and back into stocks. But the bank continued to suggest that clients keep 10% of their funds in cash, to protect themselves in case the market pulls back again. In ordinary times, clients would be urged to hold little or no cash. Bruce McCain, head of the private bank's investment-strategy team, says he and his colleagues are hoping that the market is bottoming out, but they aren't sure. 'We still see some potential for lower levels,' Mr. McCain says. The past year saw more painful milestones than most investors could digest. The Nasdaq Composite Index fell 40.5%, the worst percentage decline in its 38-year history, surpassing even its 39.3% plunge in 2000 after the tech-stock bubble burst. Volatility was startling. In October, the Dow enjoyed two of the six biggest one-day percentage gains in its 113-year history, and then gave back all the gains and fell to new lows. Four of the 20 biggest daily percentage declines in Dow history happened in the last four months of 2008. Early in October, the Dow industrials suffered their worst calendar-week percentage decline on record. Analysts blamed the swings on fast-moving hedge funds and the heavy use of borrowed money, as stocks sometimes soared one day and collapsed the next. U.S. stocks lost $10.4 trillion in market value from the market record in October 2007 to the bear-market low in November 2008, about 54% of their total market value, based on the Dow Jones Wilshire 5000 index, which tracks almost all U.S.-based companies. At year's end, the Wilshire still was $8.4 trillion below its 2007 record. Many analysts consider stock prices cheaper than usual now, but some fear they will become cheaper still. One way to evaluate whether a stock or index is cheap is to measure its price against a 10-year average of corporate profits, which smoothes out short-term earnings fluctuations. Measured that way, stock prices are below-average today, but they only just have fallen below average after being above-average for 18 years, according to data tracked by Yale professor Robert Shiller. Theoretically, price-to-earnings ratios ought to spend as much time below average as they do above-average, which suggests that P/E ratios may not pop higher right away. After the Dow's miserable year, it makes sense that stocks are due for a good year to balance things, but that hasn't always happened in the past. The Dow's worst year ever was 1931, when the blue-chip average fell 53%. In the next year, 1932, the Dow fell again, by 23%. It wasn't until 1933 that it recovered, rising 67%. The index's second-worst year was 1907, when it declined 38%. The year after that, it did rebound, by 46%. In other words, stocks do rebound sharply after a bad fall, but the trick is figuring out when they are done falling. Whether stocks indeed turn up in 2009, as is widely expected, depends in large part on how successful policy makers are in stabilizing the economy and credit markets, and getting banks to lend again. It is a market truism that investors buy or sell stocks based on what they expect in the future, rather than on what has happened in the immediate past. Because of that, investors typically spend a lot of time trying to predict corporate profits, interest rates, inflation and the like. But this year isn't likely to be a normal year, and investors aren't worrying about the normal things. They already know that corporate profits are likely to keep falling amid a recession and the Fed has indicated it will keep its target overnight interest rate near zero. They aren't worried much about inflation; the big worry is price deflation, a more insidious danger because businesses and consumers delay spending as they anticipate still lower prices. That hasn't happened in any serious way since the 1930s. 'Stocks are likely to struggle in the first half of 2009,' warned John Praveen, chief investment strategist at Prudential International Investment Advisors, in his year-end report. He forecast continued troubles in the credit markets and continuing investor risk-aversion. He recommended that people remain neutral on the stock market in the first half of the year, and be ready to boost investment levels if, as he expects, shares show signs of rebounding at midyear. Investors are trying to anticipate something they usually take for granted: the ability of the financial system to function normally. That means figuring out whether banks and other credit-market participants will lend money and buy the corporate debt and asset-backed securities that permit credit markets to operate. As the year ended, with the Fed pumping billions of dollars into credit markets, there were initial signs of thawing in things like interbank lending and demand for the highest grade of corporate bonds and other securities. But appetite for riskier debt, such as junk bonds and asset-backed securities, remained far from what it was one year ago. Until they see signs that banks are lending again more broadly, and that companies, too, are able to take risks by borrowing and investing, stock investors could remain cautious. The continuing depth of the risk-aversion and fear can be seen clearly in the Treasury-bond market. Despite the mild thawing, many investors still have appetite only for government securities. So Treasury prices remained sky-high at year end, keeping their yields down near record lows. Short-term government bills were yielding very close to zero, which did have the positive side effect of permitting the government to borrow money for almost nothing. The Fed has sought to keep Treasury yields low, in hopes of pushing investors, hungry for better returns, to risk their money on nongovernment investments. Interest rates paid by companies, sometimes measured as a 'spread' above Treasury-bond yields, have declined somewhat, but remain exceptionally high. And all but the most creditworthy companies continue to find it much harder to borrow than at any time in decades. One result of all this is that advice from stock prognosticators has been all over the map. Steve Leuthold, the usually skeptical chairman of Minneapolis money-management and research firm Leuthold Group, was almost gushing in his enthusiasm for stocks, any and all. 'Don't spend too much time worrying about what to buy,' he wrote in a December report. 'Most sectors, groups, and stocks are down big and at attractive valuations.' But Larry Adam, U.S. chief investment strategist at Deutsche Bank Private Wealth Management, told clients that while he sees hope for a rebound in 2009, he is reluctant to jump back in. 'We believe the equity markets are poised to rebound in the course of 2009,' he wrote. 'However, in the near-term, caution is warranted,' as hedge funds, banks and consumers reduce their borrowing and the economy remains weak, he added. E.S. Browning |
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