Even for Market Veterans, It's Uncharted Territory
by Jeff Sommer
After the steepest decline since the Great Depression, unalloyed optimism among veteran stock market hands is hard to find.
Byron Wien, chief investment strategist at Pequot Capital Management, says he is an optimist. Yet he advises small investors to buy gold and corporate bonds, not equities, which, he said, may be too risky right now.
Barton M. Biggs, managing partner at Traxis Partners, a hedge fund, places himself in the optimists’ camp, too. Yet he advises well-to-do investors to arm themselves — with shotguns, if need be — against the possibility of a deepening downturn and accompanying “social unrest.”
Peter Lynch, Fidelity’s legendary stock-picker, declares himself to be as bullish as ever — but he adds that this is a congenital attitude, not an assessment of the current market.
“I’m always bullish,” Mr. Lynch said. A hard-core Boston Red Sox fan, he said his heart would have broken years ago if he’d ever allowed himself to turn negative: “Three months ago, 12 months ago, 10 years ago, 25 years ago, I’d have said the same thing.”
The fortitude of even the most devoted investors has been sorely tested by the stock market decline, which already ranks among the worst in modern history. “People say they’re afraid of a stock market crash,” said Mr. Lynch, the former manager of Fidelity’s Magellan fund. “Well, we’ve already had a crash. Look at the numbers.”
The Dow Jones industrial average is down more than 50 percent from its peak of October 2007. In just the first two months this year, it declined almost 20 percent, its worst start ever. Many markets around the world have fallen even further, and the global economy is still weakening.
What’s more, over the last 10 years, a period that many investors had considered protracted enough to count as “the long term,” the stock market has actually declined in value — a reversal that generations of investors had never experienced for themselves. And despite government rescue plans around the world, there is no assurance that the slide is over.
Henry Kaufman, the Wall Street economist who has often been bearish in the face of market optimism, says that while the stock market will surely recover, many investors will need to lower their expectations.
It’s not clear that the market today presents a “buying opportunity,” he said, pointing to continuing structural problems in the economy. “There is no golden rule that says how much a market should go down,” he said.
Even after the market eventually rebounds, he said, people who expect annual returns of 9 or 10 percent will be disappointed. “Over the next five years,” he said, “annual returns of 4 to 5 percent are in the range that people might expect.”
Dr. Kaufman said that several popular investing theories “have fallen apart.” With nearly all asset classes moving in tandem, he said, diversification hasn’t been of much help, and global investing hasn’t worked out very well, either.
“Many markets outside the United States are down more than the American markets,” he said, “and certainly, in terms of flight to safety, in the fixed-income side, the money is coming back here rather than going out there.”
And, he said, Wall Street’s faith in “quantitative risk analysis” has been battered. “It didn’t save anything or anybody,” he said.
What should investors do under these circumstances? Buy high-quality corporate bonds, which fell sharply over the last year or so, and which are likely to rise in a market recovery. That makes sense to Dr. Kaufman, as well as Messrs. Wien, Biggs and Lynch. Bonds have the merit of providing steady income, at rates that are now very high; they tend to be less volatile than stocks; and they have a higher legal claim on a company’s assets.
For investors with a truly long-term view, probably 20 years or more, the market will be worthwhile, they said, because stocks should outperform other asset classes. To one degree or another, though, they said investors should be extremely cautious over the short term.
Mr. Biggs said he thinks it’s “50-50” as to whether the economy begins to recover over the next year or “whether we are going into a depression and a deflation,” which could conceivably be as painful as the 1930s.
“If we’re going into the 1930s,” he said, “it’ll be survivalism, and we’ll have very substantial social unrest.”
Mr. Wien considers that prospect extremely unlikely, saying he is convinced that the Obama administration’s economic and financial rescue plans “will do the job,” setting off a stock market rally later in the year. But he also predicted enough disturbance in currency markets for gold to rise to $1,200 an ounce from its current $940 range.
For his part, Mr. Lynch said that even after this market decline, he would stick to the view that no one should hold stocks unless they could afford to lose an additional 50 percent. And he said he had not deviated from his faith in “bottom-down stock picking,” in which investors who have done their research buy shares of just five or six well-priced companies with strong balance sheets and “compelling stories.”
“I can’t tell you anything about where the market will be in the next six months or 12 months or two years,” Mr. Lynch said. “But at some point in the future, I think you’ll look back and see that we’ve gotten through this,” and that “stocks turned out to be the best bet.”
After the steepest decline since the Great Depression, unalloyed optimism among veteran stock market hands is hard to find.
Byron Wien, chief investment strategist at Pequot Capital Management, says he is an optimist. Yet he advises small investors to buy gold and corporate bonds, not equities, which, he said, may be too risky right now.
Barton M. Biggs, managing partner at Traxis Partners, a hedge fund, places himself in the optimists’ camp, too. Yet he advises well-to-do investors to arm themselves — with shotguns, if need be — against the possibility of a deepening downturn and accompanying “social unrest.”
Peter Lynch, Fidelity’s legendary stock-picker, declares himself to be as bullish as ever — but he adds that this is a congenital attitude, not an assessment of the current market.
“I’m always bullish,” Mr. Lynch said. A hard-core Boston Red Sox fan, he said his heart would have broken years ago if he’d ever allowed himself to turn negative: “Three months ago, 12 months ago, 10 years ago, 25 years ago, I’d have said the same thing.”
The fortitude of even the most devoted investors has been sorely tested by the stock market decline, which already ranks among the worst in modern history. “People say they’re afraid of a stock market crash,” said Mr. Lynch, the former manager of Fidelity’s Magellan fund. “Well, we’ve already had a crash. Look at the numbers.”
The Dow Jones industrial average is down more than 50 percent from its peak of October 2007. In just the first two months this year, it declined almost 20 percent, its worst start ever. Many markets around the world have fallen even further, and the global economy is still weakening.
What’s more, over the last 10 years, a period that many investors had considered protracted enough to count as “the long term,” the stock market has actually declined in value — a reversal that generations of investors had never experienced for themselves. And despite government rescue plans around the world, there is no assurance that the slide is over.
Henry Kaufman, the Wall Street economist who has often been bearish in the face of market optimism, says that while the stock market will surely recover, many investors will need to lower their expectations.
It’s not clear that the market today presents a “buying opportunity,” he said, pointing to continuing structural problems in the economy. “There is no golden rule that says how much a market should go down,” he said.
Even after the market eventually rebounds, he said, people who expect annual returns of 9 or 10 percent will be disappointed. “Over the next five years,” he said, “annual returns of 4 to 5 percent are in the range that people might expect.”
Dr. Kaufman said that several popular investing theories “have fallen apart.” With nearly all asset classes moving in tandem, he said, diversification hasn’t been of much help, and global investing hasn’t worked out very well, either.
“Many markets outside the United States are down more than the American markets,” he said, “and certainly, in terms of flight to safety, in the fixed-income side, the money is coming back here rather than going out there.”
And, he said, Wall Street’s faith in “quantitative risk analysis” has been battered. “It didn’t save anything or anybody,” he said.
What should investors do under these circumstances? Buy high-quality corporate bonds, which fell sharply over the last year or so, and which are likely to rise in a market recovery. That makes sense to Dr. Kaufman, as well as Messrs. Wien, Biggs and Lynch. Bonds have the merit of providing steady income, at rates that are now very high; they tend to be less volatile than stocks; and they have a higher legal claim on a company’s assets.
For investors with a truly long-term view, probably 20 years or more, the market will be worthwhile, they said, because stocks should outperform other asset classes. To one degree or another, though, they said investors should be extremely cautious over the short term.
Mr. Biggs said he thinks it’s “50-50” as to whether the economy begins to recover over the next year or “whether we are going into a depression and a deflation,” which could conceivably be as painful as the 1930s.
“If we’re going into the 1930s,” he said, “it’ll be survivalism, and we’ll have very substantial social unrest.”
Mr. Wien considers that prospect extremely unlikely, saying he is convinced that the Obama administration’s economic and financial rescue plans “will do the job,” setting off a stock market rally later in the year. But he also predicted enough disturbance in currency markets for gold to rise to $1,200 an ounce from its current $940 range.
For his part, Mr. Lynch said that even after this market decline, he would stick to the view that no one should hold stocks unless they could afford to lose an additional 50 percent. And he said he had not deviated from his faith in “bottom-down stock picking,” in which investors who have done their research buy shares of just five or six well-priced companies with strong balance sheets and “compelling stories.”
“I can’t tell you anything about where the market will be in the next six months or 12 months or two years,” Mr. Lynch said. “But at some point in the future, I think you’ll look back and see that we’ve gotten through this,” and that “stocks turned out to be the best bet.”
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