More Misery Ahead For Anglo-Saxon Markets
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The S&P 500 and the FTSE 100 have kept sliding over the past few days. The FTSE
is at three-month lows as worries over inflation and further rate hikes,
heightened by news of the fastest jump in US wholesale prices in 15 years,
continue to dampen spirits.
Yet the “Wall Street spin machine” has been trotting out a “slew” of
strategists forecasting an 8% gain for the market this quarter - the average
fourth-quarter gain over the past decade, says Jon Markman on TheStreet.com.
Harry Dent of HS Dent Forecast and Don Hays, who runs Hays Advisory, are super
bullish, with both saying the Dow Jones is going to soar. Hays expects gains of
more than 100% over the next two years. They argue that most of the extreme
bull phases of the past century, such as 1995-1999, were preceded by
corrections then an initial strong recovery and a one to two-year trading
range. So after the 2000-2002 downturn, the 2003 recovery and the trading range
since then, it’s time for another big jump, they say.
It’s hard to share their optimism. Last week’s preliminary consumer confidence
reading for October looks bad, especially as the housing boom, which has
underpinned consumption, now appears to be slowing. Earnings downgrades for
2005 and 2006 have eclipsed upgrades for the first time in a year, and
valuations remain high. High valuations are the main reason to be sceptical. A
new boom would defy two centuries of market history, which shows that stocks go
through 14 to 15-year upswings and downswings, driven by valuation cycles.
Following a record run-up during the 1980s and 1990s, and the slide since 2000,
the market’s price/earnings (p/e) ratio is still above the long-term average.
That would indicate more misery ahead and also suggests that the run-up of the
past three years was a pause in a longer-term bear trend.
Buying now in the hope of a boom would severely crimp long-term returns. As Ed
Easterling of Crestmont Research points out, the average annual return on
stocks since 1926 has been 10%, but buying at this expensive point implies
long-term annual returns of 6% or less. Only once p/es are back to a cheap ten,
as they were in 1926, would the average long-term return be possible, he says.
Don’t buy high.
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