The weekend Barron’s has several articles on the prediction of the stock market over the next few years following the steep bear market we have seen. Articles that step back from the day to day volatility and take a long term view based on historical data can offer valuable insight and also frequently some optimism looking ahead. I generally prefer articles based on historical data over those based on someone’s opinion although a few great investors always have my ear.
One article entitled Case Closed:Stocks Work by Gene Epstein states that over 137 years from 1871 through 2008 stock market returns after inflation for 20 and 30- year periods have been consistently positive. It further states that history shows 5 and 10 year periods with poor returns are followed by much better results over the subsequent 5 and 10 year periods. Wharton School finance professor Jeremy Siegel originally researched and provided such historical data in his book Stocks for the Long Run. Barron’s asked Jeremy Schwartz of WisdomTree Asset Management to update the material using the worst-performing quartile of 10 year stretches since 1971 and the subsequent 10 year performance. The study revealed that in every poorly performing 10 year period the subsequent 10 year period was positive with a median performance of 8.17%. This compares to 6.84% for all 10 year periods. The same study for 5 year periods revealed that in 25 out of 31 of the periods returns were better with the median performance being 9.47%.
Many investors have fled to Treasuries for safety. The study additionally compares 20 year periods of long term equity performance to Treasury bond performance to find that equities out performed in almost 95% of the periods and 100% of the time using 30 year periods.
An optimistic Barron’s cover article by Andrew Barry also full of supporting historical comparisons pointed out that money-market mutual funds now hold almost $4 trillion about half of the $8 trillion U.S. stock market value. There is a good chance that some of that money will go into the stock market.
The article also states that the current PE (Price Earnings) ratio of the stock market is now around 13 based on projected earnings for 2009. This compares with a historical PE of 13.9% provided by Goldman Sachs for previous bear market bottom averages dating back to 1929. Recall however that “projected earnings” are just that and Wall Street earnings projections do tend to be high.