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Don't expect another bull market
Stock returns may never be the same - at least for this generation of investors.
By Allan Sloan, senior editor at large
Buffett: Don't bank on big returns
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(Fortune) -- Although you won't find it listed on your calendar, we're approaching the anniversary of an epochal event. No, it has nothing to do with the NCAA basketball tournament. It's a different kind of March Madness: The end of the bull market that lasted for a generation and changed the way that Americans think about stocks.
When the greatest bull market in U.S. history started in the summer of 1982, only a relative handful of people owned stocks, which were cheap because they were considered highly risky. But by the time the Standard & Poor's 500 peaked in March 2000 amid a fully inflated stock bubble, the masses were in the market. Stocks were magical, a supposedly can't-miss way to pay for your kids' college, save for retirement, enrich employees by giving them options, and regrow hair. (Just kidding about the hair. Alas.)
Stocks might go down in any given year, the mantra went, but in the long term they'd produce double-digit returns. However, one of the lessons of the past eight years is that the long run can be ... really long. As I write this in late February, the U.S. market - which I'm defining as the Standard & Poor's 500 - is well below the high that it set on March 24, 2000. Even after you include dividends, which have run a bit below 2% a year, you've barely broken even, according to calculations for Fortune by Aronson & Johnson & Ortiz, a Philadelphia money manager.
Hello? Eight years of dead money in the broad stock market? How can that be, given that Ibbotson Associates says the S&P has returned an average of 10.3% a year, compounded, since 1926? Think of it as a six-foot man drowning in a pond with an average water level of six inches - if you step in at the wrong place, the water can be eight feet deep.
To be sure (the favorite phrase of us journalistic hedgers), this has been a flukishly bad period. Ted Aronson says that it's in the bottom 2% of the almost 900 different 96-month periods in the Ibbotson statistical universe. Nevertheless, it's the return we have.
Barring a miracle - or the creation of a New Math of the market variety - there's no way we'll ever see a bull market along the lines of what so many of us grew up with. During that enchanted period, the boring old S&P returned more than 19% a year. When you include compounding, your money more than doubled every four years. Pretty slick.
That was more than twice what stocks earned in the previous 56 years, when they returned about 9%. More than half of that was from dividends, which were almost triple their current level.
Roger Ibbotson points out that my eight-years-of-barely-breaking-even number comes from starting at an artificially high point. He's right, of course. Had I had begun with October 2002 - when the S&P bottomed some 49% below its peak - I'd have about doubled my money in less than six years. He predicts total returns of 8% to 9% over the long term, somewhat less than the 9.3% he forecast in Fortune in late 2005. But of course no one knows what stocks will do - other than fluctuate.
I'm reasonably sure, though, that stocks are likely to outperform high-quality bonds in the long term - not much of an accomplishment in a world where 30-year Treasuries yield about 4.5%. However, I don't expect to be able to earn almost 20% a year for 18 years owning an S&P index fund. The long bull market was great. But it's not coming back- at least for this generation of investors. Get used to it
Stock, CRDN, I was looking to catch this on a rebound and short covering.
Anyone have any opinion about at what price this may bounce and how much up?
Roy, I don't think a lot lower is the way to think of it. The SPY is already down 18% from its high, so eventually down another 7-12% isn't a lot lower. The IWM is down 20%; another 10% isn't a huge amount lower.
If we enter a period of 2-5 years of slow growth, what would be the proper PE for growth stocks? Maybe something like 12-20?
And the market doesn't have to drop that much, what also could happen is that we stay in this trading range several more years. Maybe a little lower range. And if we do hit those sorts of lows it could be in late 2009.
I think the housing slowdown and debt problems take a long time to resolve and leave a lasting impression on spending.
Correct me if I am wrong here, but if farooq is right and the war in Iraq ends soon, the troops come home and unemployment will soar. Oil may well fall and energy stocks will also fall. Defense stocks will fall. If tensions decrease won't gold and some commodity stocks also fall? I doubt all this will cause the financial sector to soar.
In the 70-74 market, the Vietnam War ended and USA troops were withdrawn on March 1973. Using the SPY index, after the May 70 market bottom of 68.61, the market then peaked at 117.37 in Dec 72, and dropped to 64.40 in Dec 74. After that we had another big rally.
Aren't wars are generally considered a big fiscal stimulus since it causes higher employment and higher GOV spending? So isn't the immediate after affects of ending a war a winding down in spending and a repayment of debt?
Mostly thinking about Japans’ market reactions to the bursting of their RE bubble, and the USA reactions to ending the Vietnam war, and the past cycles of recoveries from huge bear markets. Meaning our 2000-2002 was a huge bear market followed by a huge recovery which should be followed by a lesser bear market. But bear markets are at least 20% down.
I think Monday's Dow is almost sure to be negative because BA lost a contract to NOC, and BA is a large part of the Dow. And because we are sitting on these trend lines fear will be rampant, so in the market I think a gap down in the AM.
Only thing that could change this is some surprise, like a deal on ABK or a Fed lowering, something big.
I did see some OEX buying of calls Friday, and the OEX went to levels that put buyers on Thursday are well in the money. And the series of OEX puts that expire weekly are over with.
My feeling is that the big players would like to establish a base around current levels, to do so they would need a hammer down and big recovery on Monday. If the deal on ABK is for real, that could be used on Tuesday to keep the market moving. If they can make it look like this is a base, then then can rally back up to something like 45+ on the Qs.
I think all of this is nothing more than bear market rallies, and that this bear could last into Aug or into 2009, and eventually the indexes will be down more than 20%, more like 30% from their highs.
Any thoughts?
croumagnon Easy answer, if someone is stupid enough to buy the calls at 0.10, then the MM is glad to sell them. But why put in to sell at 0.05 when they can maybe get 0.10? And maybe it looks more attactive to a potential call buyer.
But when you put in your offer to sell, the MM didn't want to lose out on that free money, even if it was only 5 bucks a contract.
I have seen this type of thing often on illiquid options, and it happens on the bid as well as ask, and often there is a hidden bid or ofter inbtween the spread.
Odds to me favor a move up Monday in the AM. THis market does not seem like a possible crash market, just too many shorts for that to happen, to many are in cash.
But I will bet overnight on a downdraft, but not on a big move up in the market.
OT: IBD problem today. The leap year messed them up, so that messed with all their settlement issues and the Oex options that expire today, IBD didn't know they existed. When I tried to pull the series up, they didn't have them.
Messed me up because options I sold yesterday were still holding up margin for today.
farooq, the calls I bought at 69, they were 75 for a few seconds. Even though I saw this selloff coming, I still sold my puts for far less than I should have.
No republican can win even if JC himself was running. Obama is most likey, fresh face and optimistic speaker.
Farooq, April takes some of the fear out. For what is it worth I think that was a good call on your part. I think 43 holds, and holds on Monday. But from what it looks like to me, you will have to hold them for the real profit, I doubt they gain much today.
So what makes you say the war is ending soon? Some contacts you have in the middle east? I could see it happening, oil is acting like wall street is trying to destroy any early shorts in it. When something shoots up too fast the end is often near.
Got back out at 0.70, it if rallies it will to do it without me.
They do a deal on ABK over weekend, whole marekt will rally 200 points back up. A fairly big bank fails, mabe a whoosh?
I don't know, I did see 3000 qqqq 43 puts trade in what looked like a sell at 1.09, a penny off the highs. And farooq draws his line in the sand at 43, he is a smart guy, I will go with his thinking.
I am not fond of index calls, but a buck is a buck and I didn't want to make any individual stock buys on the calls side.
Bought March 44 calls at 0.69, I don't know, just seems scary.
Roy, this might be the beginning of the end of this phase of the bear market. Meaning the blow off down phase. Sure looks like it.
Any thoughts about this? Recovery in last 1/2 hour is now the only hope of bulls.
farooq, no rally today, no one is pumping them up, this is let it all hang out and see where it goes.
farooq, 22% a day with 1% loses is something I dream about, you are one of the best analyst on the market. Roy is probably the best day trader I have ever seen. I am sure there are better, but I don't know them. :)
Roy, the most positive thing I can say right now about the indexes is that a lot of protection was bought yesterday, and the reason it seems frozen (a few hours) at current prices is that all the selling is being absorbed by those who bought the protection.
I don't believe in the PPT, but I do believe that mutual funds and the like never want to the market to move straight down. Two steps down, one step up. And besides, if you have an unlimited number of shares (which to all extents that is the position of mutual funds) extracting the most profit from a declining market is their job, it isn't like they can sell out of all of their SP500 stocks, they own 90% of all the shares.
Looks like we are breaking (another loose term for crawling in this case) to the upside out of this congestion area. If the market can convince enough people that this is a bottom maybe we can put in a base and rally into the summer. I am like everyone else, no one knows how a housing recession the magnitude that we have will affect the USA in the longer term.
Roy, if I had bought calls I would have lost money, thus you are a better trader. :)
I have a hard time trading against what I believe to be the longer term trend.
Roy, maybe I should enter politics? Heads I win, tails you lose?
Looks like it is trying hold the line at 43.20-43.25, if it holds long enough maybe it goes up. But I am not brave enough to make that bet.
Roy, rally being a rather loose term in this context. I wouldn't buy calls on the index till it violated a BB or tests the old lows. I am just not as good as roy at day trading. :)
Think we rally from 43.25 to 43.50, then back down after the noon hour.
Sold QQQQ 42 puts at 0.50 for 51% gain.
farooq, Whenever I over think my trades it usually results in losing money. And I can spin as many scenarios as anyone.
I know what you are saying, but the MM has very little control over the index market. They will typically hedge their risks by shorting stocks or using other options.
And a big trade, (which I cannot say what big really is, 5,000 at .34 is $170,000, not big by mutual fund standards, but a pretty good size) is normally entered into as a block trade and the MM knows about it in advance, so the puts could have been a combination of more expensive puts were shorted at higher prices by the MM so that they could sell it to the buyer at 34. If the MM knows there is a sure trade at 34 for 5000, they can short a lot at 35-41 and sell it all to the buyer at 34. There are many ways it can be done, but the options MM is always going to want to be delta neutral at the end of the day.
So I doubt the MM at this point really cares what happens to the market.
IMO nothing in the market is as it appears, but that is what we all have to live with.
I was thinking of you when the market closed and the last trade I saw on that option was 40 at 1.12, I had thought you put in at 1.10 in an earlier post and thought that might have been your trade. Congrats on the 22% return.
You can tell its set up to break down, at least on Friday. And everyone will be waiting with bated breath for the bank that is going to fail.
OT: Farooq, thanks very much, I will preface anything with stock that is concerned only with an individual stock.
farooq, I also saw 5,000 of the Q 42 puts trade, and a bunch of the OEX 625s that expire on Friday and the 620s that expire at the end of march cycle.
So if something is going to hit, it seems like tonight.
Danger will robinson, danger. Posted not too long ago on the ninja board that I saw some pretty negative indications, specifically a ton of Q puts and a mini ton of OEX puts trade.
I think the Ninja is down again.
So is this the new site? I used to have a bits IHUB ID, but forgot the password login.
I had created a Ninja IV site 6 months ago when I saw how many problems with global crossing.
http://www1.investorvillage.com/index.asp?
Don't mind using ihub, but then I won't use global crossing at all. And I understand that farooq doesn't want any individual stock talk on the board.