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Home > Magazines > Forbes Magazine |
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Money & Investing
Coping With a Crazy Market How to survive volatility: Take a deep breath, take a very long term view and keep an eye on corporate earnings.Curious comment that appeared in a competing business publication the day after the Dow crashed 234 points in mid-July: "Yesterday's seesaw trading failed again to give investors the one thing they needed most: a clear picture of where the stock market is headed."Yes, it's too bad that when the market is about to lurch up or down 200 points there is no announcement made one day in advance. One thing doesn't change on Wall Street: Stocks fluctuate. Over the short term, the fluctuations look pretty much as if they were random numbers plucked from a lottery bowl. Over a very long time, however, the market does follow a predictable trend. It gets tugged upward by the upward march in corporate earnings. Knowing that, you can cope with the daily volatility. You can make it less likely that you will succumb to irrational exuberance, as day traders did three years ago, or sell out in a panic after a crash, as mutual fund investors are probably doing right this minute. (Hot funds like the ones run by Janus tend to take in lots of new money after a streak of good performance and then suffer net redemptions after a losing streak. Somebody out there is buying high and selling low.) The long-term picture is displayed in the chart. The orange line shows quarterly closes of the S&P 500 index, restated in year 2002 prices. The red line shows what stocks would have been worth at a constant 16 times earnings. We smoothed out the earnings by taking a ten-year moving average of them. These are bottom-line earnings as reported by Standard & Poor's--that is, with all the writeoffs included. We inflation-adjusted them. Our moving average looks backward eight years and (cheating a little) forward two. For 2002 we assume bottom-line earnings of $30, up from last year's $25 but more pessimistic than the consensus forecast; for 2003 we guesstimate $45. By the metric of inflation-adjusted earnings, stocks got way out of line a few years ago. That period of exuberance followed a long stretch in the 1970s and 1980s when investors were in a slough of despond. There was a glimmer of rationality in what they were doing: In the crash of the 1970s, investors were anticipating the stagnation in real earnings; in the wild bull market of the 1990s, they were reacting to the uptick in earnings growth. But they really overdid it. Our chart, moreover, does not show dividends. Yields were much higher in the 1970s and 1980s than they are today. Figure them in, and corporate performance turns out to be not so weak in the 1970s and 1980s, nor so terrific in the 1990s, as it at first appears to be. Can we tell you where the market will hit bottom? Nope. We can say with some confidence that if you buy near the red line--at 16 times earnings, averaged over a long stretch--and hold for a long time, you can reasonably expect a real total return in the neighborhood of 6.3%. That figure is your earnings yield for stocks bought at a P/E of 16. This is not bad for a real return, and it's not far from the performance of stocks over the past century. It is, however, a lot less than what great masses of investors were expecting when they bought into the bull market. We can also give you some perspective that will help you invest for the long term. This issue's 20-page Money & Investing section tells you about funds that hold up in a bear market (page 116), about stocks that even bears like (pages 122 and 136), about decent buys in the tech, real estate and utility sectors (pages 124, 126 and 134) and about how to get more from the most conservative part of your portfolio (page 146). Chart Corporate Performance -
Pitt Is The Man--For Whatever - 10/10/02 9:12:21 AM ET Democrats think Pitt is biased and should go. That means, of course, the record-setting chairman must stay. A Monster Of A Laptop - 10/10/02 10:00:00 AM ET Most laptops are intended to be small and light. One of Toshiba's latest goes in the other direction. Canadian And Mexican NAFTA Plays - 10/10/02 8:30:00 AM ET The eight-year-old trade agreement has benefited companies both north and south of America's borders. GM To Offer No Downpayment - 10/10/02 10:45:04 AM ET General Motors will allow buyers to buy most vehicles with no down payment and no payments for 90 days. Enterprise Software Firms Up To Bat - 10/9/02 1:45:00 PM ET Siebel Systems, PeopleSoft, i2 Technologies and SAP all report earnings next week. It won't be pretty.  |
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Market data provided by Reuters. Disclaimer Stock quotes are delayed at least 15 minutes for Nasdaq, at least 20 minutes for NYSE/AMEX. U.S. indexes are delayed at least 15 minutes with the exception of S&P 500 which is real-time. Forbes 40 Index powered by Telemet. News may include latest headlines from Reuters. |
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