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Mix-Ansicht- Equities' golden era gone - via fallstreet.com (Schliesst sich der Kreis?) - Talleyrand, 30.04.2001, 15:43
Equities' golden era gone - via fallstreet.com (Schliesst sich der Kreis?)
Monday, April 30, 2001 - 12:00 a.m. Pacific
Analysts: Equities' golden era gone
By Ken Moritsugu
Knight Ridder Newspapers
NEW YORK - The stock market has been showing signs of recovery in recent weeks, but don't expect a return to the phenomenal gains of the late 1990s.
With the bursting of the high-tech bubble, investors face the likelihood of lower returns in the coming years.
"We have now departed a two-decadelong golden era for equity investors in which we literally never had it so good, and are entering an era in which the party is over," said John Bogle, retired founder of Vanguard mutual funds.
That does not mean stocks are a bad investment. In the long term, they outperform bonds, money-market funds and savings accounts, and most analysts expect them to continue to do so. However, investors can no longer pump money into mainly technology stocks and enjoy immediate gains. They can expect solid returns if they diversify and are willing and able to wait.
Stocks gained an average 11 percent a year over the past 40 years, but the results varied from decade to decade. From 1961 to 1981, stocks rose just 8 percent annually, but from 1981 through early this year, they shot up at a 15 percent pace, even factoring in the 1987 crash.
Looking solely at the late 1990s, stocks gained more than 20 percent a year, with the tech-heavy Nasdaq rocketing 85.6 percent in 1999 alone.
"All this has raised expectations of some investors about how well their investments will do going forward," Mary Farrell, senior investment strategist at UBS Paine Webber, wrote in her book on investing,"Beyond the Basics."
"It is important... to underscore that we expect the performance of both stocks and bonds to return to the much more moderate historical levels in the foreseeable future," she added.
Behind the run-up in stocks at the end of the 1990s was a virtually unfettered optimism about the future of the high-technology sector.
The market was driven by momentum investment, in which investors jump on the bandwagons of rising stocks with little or no regard for a company's financial situation.
The most obvious examples are the dot-com Web sites that never made money and have gone bankrupt. Also, the stocks of many computer and telecommunications companies soared and then collapsed.
The Nasdaq composite index has lost more than half its value since it closed at 5,048.62 on March 10, 2000.
Since then, the momentum-based market has given way to a fundamentals-based one, in which investors focus on a company's profits and price-earnings ratio, or the price of a stock vs. the company's earnings per share.
"At the end of the day, earnings and profits actually mattered," said Mark Sanborn, co-head of global stock trading at Lehman Brothers.
Lest investors lose faith in stocks, Sanborn and his colleagues are spreading the message that patient investors should be rewarded with a solid return over time.
Bogle, the retired Vanguard founder, divides market performance into speculative and fundamental returns. From 1961 to 1981, the fundamental return on stocks was 12 percent, but the speculative return was negative 4 percent, leaving a net annual return of 8 percent.
From 1981 until early this year, the fundamental return was only 10 percent, but the speculative return was positive 5 percent, for a net annual return of 15 percent. Bogle thinks the odds favor a return to negative speculative return over the next decade, producing a single-digit net return of perhaps as low as 5 percent.
James Glassman, co-author of a much-debated book that predicts the Dow Jones industrial average will reach 36,000, thinks Bogle's view is overly pessimistic. Stocks entered a new era in the early 1980s that will push them up sharply to the 36,000 level before growth levels off, Glassman said.
Ash Rajan, director of global client equities for Prudential Securities, thinks the market could be in a strong recovery by fall.
He advises investing in nontech sectors such as retail, energy, pharmaceuticals and certain financial services, such as insurance.
Copyright © 2001 The Seattle Times Company
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