This Market Is Different

 

All of the talking heads have been telling us that this market is different. You are going to have to be patient and soon (hopefully in your lifetime) the DOW and the Nasdaq will be back at their old highs. They cite all the statistics about how the economy is improving - consumers are spending, the consumer confidence index looks OK, unemployment is getting better, blah, blah, blah.

Those trees are all nice, but they better step back and look at the forest. It's on fire and going up in smoke. The major trend has been down since the beginning of 2000 and is continuing with only occasional brief upward movements. The Dow lost 6% in 2000 and another 7% in 2001 and so far this year is off almost 8%. I won't mention the Nasdaq. That is ugly.

From 1931 to 1951 the economy doubled. The Gross Domestic Product was up 100% yet the stock market did nothing for 20 years. What few investors that were left after the '29 Crash made their money from dividends not stock price appreciation. It took 25 years for the stock market to go back up to the 1929 high.

Why are we in a bear market that can last for many years when things look so good? There does not seem to be a correlation between a good economy and stock prices. For more than 100 years the P/E ratio for the S&P500 index has been about 15. Today it is 41. That is figured on the earnings of a company paying you back your money in 41 years. YEARS! Are you kidding? I'll need my money before that. Very simply this is telling you that the stock market is very over-valued. Either corporate productivity must increase dramatically or stock prices must come down. Right now it looks like the latter is happening. So far about $6 trillion (that's with a 'T') has vanished from stockholders portfolios these last 2 years. Nobody else got it. It's just gone. It was all paper profit anyway.

Your broker tells you you don't have a loss until you sell and not to worry as the market always comes back - except when it doesn't. Since 1920 there have 3 major bull markets that have lasted about 16 years. The last one started about 1982 and ended at 2000. Each one of the bulls has been followed by a sideways to down market for the next 16 years. I am no soothsayer, but this has all the makings of one of those 16-year periods. What to do?

There is only one thing that is prudent until the carnage stops. Sell out of all stocks and stock mutual funds except no-load bond funds. (It is not too late to sell.) There are many good ones such as Government, International and Mortgage Backed no-load bond funds with varying lengths of maturity. It may not be exciting like the 1998-99 run up, but you will have your money when the dust settles.

This market is different. It's a bear.

Comments to al@mutualfundmagic. com

Copyright Albert W. Thomas All rights reserved.

 



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