Can the Current Market Rally Last?

The current rally in stocks appears to be starting to look impressive. The S&P 500 Index is up by approximately 16% (as of 4-30-03) from its Mar 12 inter-day low. And when you look at its longer term performance, the Index has now been showing a positive trend going all the way back to mid-July of last year.

As encouraging as this sounds, the magnitude of the gains during the last 9 or so months have cumulatively been small (less than 4% since Aug 1). And when you subtract out the possibility that the Index may have been unduly influenced by just sheer relief over the start and end of the war, you see virtually no gains since late July/early August.

But choosing to focus on the larger 16% figure, many investors and investment advisors are starting to feel more optimistic. But to my way of thinking, short-term psychology rather than long-term fundamentals are behind most of the current rally.

And Alan Greenspan's positive comments before the House on 4-30 appeared to be so filled with qualifiers (he expects improvement "provided that ..."), that we continue to view his statements as far short of "real" forecasts and closer to expressions of "if everybody only had more confidence in the economy, like I do, things will probably be fine."

But having more confidence is indeed difficult when, as either a business person or an investor, you see opportunities that previously seemed to exist now highly up in the air. And while consumers are saying they are more upbeat now that we've won the war, they probably realize deep in their hearts that a rough road for the country and themselves personally may in fact still lie ahead.

It was interesting to note that in an Apr 30 Wall Street Journal financial advice column, readers were given the following scoop: Four categories of bonds offer the prospects of better returns looking forward, helping you to avoid potential negative returns in other bond categories if interest rates go up: High Yields, Inflation Protected, International, and Short Term Corporates.

But regular readers of our Newsletter were given almost precisely this very information on July 1, 2002, 10 months earlier, (in Newsletter 65) and several times since! And since July 2002, each of these types of funds, especially the first 3, have done outstandingly well.

Of course, no one can predict the unknown future assuredly enough to tell you whether the current stock and above type of bond fund rallies can continue to last. This is a question that tends to be more on the mind of short-term traders than long-term investors. But even long-term investors can obviously benefit by forming an opinion on this question. Because if the stock market rally is not for real, the damage many have suffered could well continue for much longer than many expect. And if certain categories of bonds still seem attractive, prudent investors might want to take to heart the notions proposed in the two external links in the adjacent article to the right and adjust their portfolios accordingly.

It's too bad the "free ride era" is over. What was the "free ride era"? It was back in the mid to late 1990s, when almost any stock-related investment you picked, it seemed, would lead you to easy success.

Back in Apr, 2000 (Newsletter 22), I stated as much indicating that we are all going to have to work harder to achieve decent returns. And although few people wanted to accept that back then, or even now perhaps, we think it has become quite obvious over the last several years. Our Newsletters have been geared toward helping you with some of that hard work, and hard-thinking, that will hopefully enable you to stay on track.

But it's not just the stock market's free ride that's past history. Back then, you could get nearly a 6% compound yield without taking any risk in a good money market fund. Today it's more like 1%. What this means is that if you've moved some money out of stocks into cash, your real return after inflation (and possibly taxes) is decidedly less than 0%.

Of course, most people hold on to the hope that in the years ahead, when many of them hope to retire, stocks will again return to their winning ways. After all, stocks have averaged returns of about 10% over the last 100 years or so, right? So, it seems, this would be well worth continuing the ride assuming we get the payoff in the end. But will we?

If you, like the majority, cling to this optimistic view, or just if you wish to see an interesting projection of future possibilities, I strongly urge you take a look at this free article from the New York Times. The gist of this article, based on research by experts at 3 top universities, states that due to cashing in of stocks by retiring baby boomers during the next 15 years, there will be more sellers than buyers of stocks, causing prices to continue to head down.

While obviously, population trends are not the only determinant of stock prices, we can find other reasons for caution in assuming that stocks will always eventually reward investors, an assumption that therefore relieves us from having to think (or worry) much about our investments. The main one is probably this: The world is far too unpredictable a place to simply have confidence in any one anticipated-in-advance outcome.

Remember all the people who until recently thought they had job security, pension guarantees, and who thought that only people in foreign countries, certainly not here on US soil, had to worry about major loss of life as a result of foreign hostilities? And when many people thought they could believe what widely quoted financial industry experts said about the prospects for stock investments (never mind that they had and still do have a financial and career interest in the very investments they were touting)? And perhaps to show the point even further: Surveys have shown that a large percentage of people no longer feel that they can even count on Social Security being there in its present form when it's time for them to collect.

Couple this unpredictability with the proven fact that most people are poor market "timers" and it becomes even more reasonable to conclude that many of them will never achieve the promised 10% annual returns: We all, even the pros, tend to make the majority of our purchases, exchanges, and cash outs at just the wrong times.

But there may be a small possible exception to this tendency for seemingly valuable things that once were, such as the near guarantees above we came to expect, to continue to go the way of the horse and buggy. I'm referring to this Newsletter. But this can only happen if something different begins happening soon. For a variety of reasons, most people, it seems, will not sign up for a password for a free Newsletter with a proven four year track record significantly ahead of most other investors. But without those sign-ups, we don't think people can profit very much from seeing what we have to offer, nor will we have a subscriber base of sufficient size to justify the amount of work necessary to keep producing new material on our site.

While, of course, some people will not sign up for information merely because they simply feel they do not need it, research shows that the vast majority of mutual fund investors consistently achieve results far poorer than market averages. For example, from January 1984 through December 2000, the average yearly return for the S&P 500 Index was 16.3% a year while the same results for stock fund investors was a scant 5.3% a year! - for an interesting perspective on this which includes the role of psychology in investing, you may want to briefly visit this article. In actuality, then, it appears that more than just a relatively small handful of investors should be able to make use of the systematic and research-based information we provide.

Of course, I too could attempt to use the kind of marketing strategy utilized elsewhere entailing advertising and promotion (or hire people to do that for me), all geared toward heightening this site's visibility. But I'm not a businessman - I'm a writer, a researcher, and most of all, an investor, one who has done well enough that I figured maybe others could also benefit from my ideas and views on what I see as a constantly changing world of investing. So, we'll just have to wait and see what develops.

Sincerely,

Tom Madell, PhD,
Publisher