THE GREAT RECESSION HAS ENDED!
· Dow Jones Industrial Average range: 10,800 to 11,850 -with upward momentum
· Inflation (CPI): about 2%
· Real growth of domestic production (GDP): growing to 3.40%
· Price of barrel of crude oil: $79 (average price)
· Average yield on money market funds: continuing below 1.0%
· Unemployment: edging downward to 9.5 %
· 30 year fixed rate mortgage: 5.0% (average on conforming loans)
· 10-year treasury notes yield: 3.8%
· Interest rate trend: minimal upward adjustments
· Increase in S&P 500 corporate earnings: 14%
· Expected average real, total return on equities: 6.2% to 8.2% over next 5 years
The bear market of October 9, 2007, through March 9, 2009, witnessed not only a 57% decline in U.S. equity prices, but also the demise of many investors' faith in the market economy so dear to the capitalism. Fortunes were wiped away in this 17-month mega-meltdown that was triggered by the simultaneous popping of the commodity, credit, real-estate and emerging equity market bubbles. This was the second-deepest in the past 80 years, only surpassed by the Great Depression of 1929-1933 wherein equities declined by a horrific 86%. There have now been 3 mega-meltdowns (equity declines in excess of 40%) since 1945: 1973-1974 wherein the S&P fell 48%; 2000-2002 saw a 49% slump in the S&P; and the recent 2007-2009 57% pull-back. All three of these mega-meltdowns were over in less than two years; and it took an average of five years, in the case of the first two declines, for share prices to get back to their pre-meltdown levels. If past is prologue, then the key indexes could eclipse their all-time closing highs of October 2007 - 14,164 on the Dow, 1,565 on the S&P and 5,132 on the Nasdaq, by 2013/2014, in my judgment, except for the Nasdaq which will take a couple years' longer.
On Monday, March 9, 2009 the Dow Jones Industrials dropped 80 points. Which of us knew that we had just seen the bottom of one of the worst bear markets in history? The next day, Tuesday, March 10, 2009, the Dow soared 379 points to close at 6926. By the end of the month just three weeks later, the index had tacked on 1060 points from its low. Is it not still surprising how sudden and sharp the reversal was? But if you have lived through or studied previous market bottoms, that's often the way it happens. What was it that set the market direction upward on March 10? Historians will have to give the definitive answer, but Citigroup, in a leaked internal memo, said that it was having a good first quarter and would report positive earnings. This sent financial stocks soaring as investors perhaps hoped that the worst of the financial crisis might be nearing an end. And the Dow has not looked back since. As the legendary American financier Bernard Baruch quipped: "Don't try to buy at the bottom and sell at the top. It can't be done except by liars."
In my Economic Forecast for 2009 (POA Journal, March 2009) I concluded with the following paragraph which bears repeating for its prescience. I am a long-term student of the investing techniques of Warren Buffett, chair person of the Berkshire Hathaway Company and wealthiest person in the United States. It is an old cliché that they don't ring a bell at the tops and bottoms of markets, but it is not entirely true. Occasionally someone climbs up in the belfry and does just that, as a public service, but knowing that few are likely to heed the bell. That someone is Warren Buffett, and the reason he is one of the richest men in the world is that he understands asset values and human behavior as it relates to those values better than anyone. In 1974, which prior to now was the worst bear market since the 1930Is and the best buying opportunity since then, he recognized that the values were compelling and advised that the time was right to start investing. In 1999, he warned that prices were very high and future rates of return likely to be far below normal. Sure enough, the trailing 10 year return on stocks is now negative, something seen only a few times in history, and an event that has historically heralded strong returns over the next 10 years. Mr. Buffett has returned to the belfry to ring the bell again, with his October 17, 2008 New York Times op-ed piece saying to buy American stocks, that the values are once again exceptional. The stage is being set for a 10 or 15 year bull market. Once again, few are paying heed. I am!
While I can certainly provide no guarantees regarding future returns, I do firmly believe that looking back five-to-ten years from now, even from the current levels in the market, this will have proven to be an excellent time to be actively investing.
The Hebel maxim: There is no safe, quick and easy way to build wealth. A firm commitment to a well conceived long term investment strategy using a well diversified portfolio is required to accumulate wealth over time. This endeavor is best viewed as a marathon rather than a 100 yard sprint. Within the context of alternating bull and bear markets, the main long term forces of the market have historically favored the bull.
