Market Pulse: Some perspective is in order
November 19, 2014
The market is usually volatile during the fall season, and this year was no exception. A four-week 9.8 percent decline was followed by a two-week recovery to new highs.
Is this volatility unusual? A little perspective is in order.
Burton Malkiel ("A Random Walk Down Wall Street") recently put the market's volatility in perspective. Since 1927 declines of 4 percent or more have happened on average every 2.5 months.
The average decline was 8.9 percent. The recent fall to the October 15th low was 9.8 percent. Since this bull market began in March of 2009, the average decline has been 6.8 percent. Bottom line: move along folks; there's nothing to see here.
The buzz when stocks were falling was about slowing global growth and problems in the Mideast, Hong Kong, Brazil, Europe, Ukraine and with Ebola. All valid concerns.
However, little if any attention was paid to the 800-pound gorilla — the need to put money to work — that would soon halt the slide and trigger a sharp rebound.
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Again and again I've made my bullish case in part because hedge funds, pensions, endowments and both professional and individual investors need to put money to work.
Where will money be treated best? In bonds? Not at such low rates. In commodities? Not practical for most investors. In gold or silver? The worst investments over many years and they pay nothing. Treasury bills, money-market funds, CDs? They pay almost nothing. So what's left? Stocks that pay dividends and increase their earnings.
Dividend income is treasured in a low-rate environment, but earnings growth is the mother's milk of a bull market. Without it, or at least the expectation that it will soon appear, stocks won't go far.
Third-quarter S&P 500 earnings rose 8 percent and next year are estimated to be $126-$133, which means the index trades for 15 times earnings, more or less the historical average.
Bull markets don't die of old age nor do they end when stocks are fairly valued, as they appear to be now.
They end when enthusiastic investors and speculators push stocks too far, making them grossly overvalued in view of the economic and profit outlook (think March, 2000).
We are not even close to that. It's still a bull market.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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