When I started at Merrill Lynch in 1979, the Dow Jones Industrial Average was around 800 and ten year treasuries paid 14.7%. Whether you bought stocks or bonds, heck, even cash, everybody made money back then. The market hit a new high almost every day and it got so we started to think we were all geniuses.
Starting to seem like old times, doesn't it? Last week, the Dow crossed a bunch of new thresh holds and closed over the 16000 mark. The S&P 500 and the Nasdaq ruffled up their feathers and quickly followed suit. If you've had all your money in the S&P this year, you're up almost 30%. Wow.
"Which is great," I can hear you saying over there in the corner, "if you . . ." and then your voice suddenly disintegrates into a low, incomprehensible mumble as you stare down at your shoelaces.
Turns out some people - all the sane people, in fact - got scared out of their wits when the market collapsed in September of 2008 and we went to bed at night for a long while not sure if we'd have a global economy when we woke up the next morning.
All of us were playing financial defense in 2009 and 2010. Folks sold their stock funds like crazy and put everything all under the mattress (or in a money market fund yielding under 1%, which is the modern day equivalent). A few of you bold ones got tired of waiting and dabbled in some of those "conservative" income funds paying 5 or 6%. You may not have made much money, but at least you didn't lose any more.
Ladies and gentlemen, I see you hiding over there on the sidelines. You've been watching, biding your time - kicking yourself lately that you missed the big year. "Am I too late?" you repeat for the 87th time as the DOW hits yet another new high.
I've got good news. The last couple of years we've just been making up for the time we lost in the secular bear market that started with the tech bubble of 2000 and ended with the greatest washout since 1932. This bull market won't go straight up. They never do. But stocks should average 10-15% through at least the end of the decade.
Here are five reasons to tape to the bathroom mirror so you don't forget the fundamental reasons why investors in stocks will be happy::
1. Real estate moves in elongated, linear cycles. It was over-inflated real estate that got us into that mess in 2008, and after six bad years, it is real estate that will lead the economy out. According to a recent Harvard study, 1.6 million houses need to be built every year for the next 10 years to meet demand. We're not even back to a million.
2. The infrastructure build-out in emerging economies was delayed, not derailed. China is currently experiencing the largest urban migration in the history of mankind and they need more of everything, including power plants and roads and more buildings where people can live and work and the equipment and materials to build those buildings and roads. - Oh, and just in case you didn't notice, Europe did not go out of business as was widely predicted, either.
3. Technology, technology, technology. The competitive landscape is changing at warp speed - faster than a lot of big old, brick and mortar companies can react. But the internet lowers the cost of connection and offers amazing opportunities to anybody who can get their hands on some connectivity, a little financial backing (easier than ever with crowd-funding) and some fresh, passionate ideas. Efficiency and productivity gain from technology and wealth building is the natural and inevitable result of gains in productivity.
4. For the time being, America is in pretty good-shape energy-wise. The jury is out on the environmental impact of fracking (hmm-mm, not my favorite), but we should be net exporters of energy by next year and not have to worry about running out of fossil fuels until at least 2020. Alternative sources are making big strides.
5. Debt worries have been blown way out of proportion. Debt service is half of what it was in 1989 and because of economic growth the deficit is rapidly shrinking. Corporate America has taken full advantage of ridiculously low interest rates, refinanced all their outstanding long-term debt, and borrowed a little extra "just in case." The economy doesn't even have to grow. Earnings will go up just because of lower interest costs. Leverage, used appropriately, can and will make this market sing.
Next post: Let's talk about Amazon and why I own a company that makes no money.
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