Investors: Spring is coming

Posted: Thursday, December 28, 2000

NEW YORK (AP) -- Investors, take heart. The days have started to get longer and brighter. The Federal Reserve might lower interest rates. And the odds favor a rising market in 2001.

This isn't meant to minimize the damage -- the Nasdaq is about 50 percent lower than it was in March, its worst performance since it was created in the 1970s -- but simply to point out that all this is past.

The brighter future, according to Gerald Perritt, a former math professor before he founded the Mutual Fund Letter and began roaming the statistical warrens, can be found in an analysis of annual changes since early 1941.

First, he found that the Standard & Poor's 500 stock index finished the year lower than where it began 15 times, but only once, in 1973 and 1974, did it decline in two consecutive years.

Next, he found that the average gain in the index during the years following a decline was 16.4 percent, compared with an average gain of only 9.9 percent for all the years since 1940.

After examining these and other numbers, Perritt concludes that (1) the odds are slim that the S&P index will decline for two successive years, and (2) the odds favor an exceptionally large gain after a decline.

That said, there might be investors who still need reminding that past performance isn't necessarily an indication of future performance. It isn't, of course. But history also has lessons that can't be ignored.

Accompanying this commentary is a little asterisk calling attention to the difference between the Standard & Poor's index, which includes many blue chips, and the Nasdaq, which includes many dot.coms and the like.

While the S&P 500 also has many high-tech companies, it didn't suffer like the Nasdaq, so it can't really speak for it. Still, it does suggest that those with deep losses in 2000 might earn something back in 2001.

Moreover, the securities markets during this year were beset and depressed by multiple -- and to some extent unrelated -- problems that aren't likely to occur two years in a row, especially among technology stocks.

The March breakdown in high-tech shares was a long time coming; many wise market analysts had warned about it for months before it occurred, pointing to absurdly high price-earnings ratios and the lack of earnings.

In retrospect, it is easy to understand that unwarranted enthusiasm was bound to be trumped by reality. One of history's lessons is that norms and standards may be ignored for a time before reasserting themselves.

Moreover, the high-tech ascendancy was more a generational phenomenon than a short-term event -- one of those rare tidal sweeps that changes business and peresonal affairs. It was the onset of the ''New Economy.''

An event of that sort tends to become more intensely exaggerated than short-term developments and just as likely can lead to more dramatic corrections, although not necessarily back to long-term norms.

The market was also obsessed with the possibility of ever higher interest rates, and that fear eventually eroded confidence. Forecasters continued to recommend stocks after March, but investors not longer believed with the same conviction. They sold out their losers for tax deductions.

Still, the residue of the exuberance that frightened Fed Reserve chairman Alan Greenspan could be read in the assurances offered by market analysts that a yearend rally could be expected.

The two major presidential candidates took care of that. Potential investors were just waiting for the election to be over, it was said, and they would buy up a rally. But the election turmoil overrode that.

There may still be obtacles ahead. But as Perritt points out, the average bear market lasts about 11 months, and this bear market is now 9 months old.

In short, he says, ''not only do the odds favor a healthy market during the next two years, history suggests that a stock market turnaround may be on the horizon.''

End Adv for Thursday, Dec. 28

Subscribe to Peninsula Clarion

Trending this week:


© 2018. All Rights Reserved. | Contact Us