What Should Happen In 2003

What SHOULD the Stock Markets do?

This article was originally published in January 2003 for RC Peck’s Fearless Wealth Newsletter.
I don’t know what’s going to happen this year, but I do know what Wall Street is saying will happen. They think the markets will go up. They have to think this because they are paid to think this. Their products only sell when the markets go up. What else can they say?

Wall Street says the market has to go up this year because markets almost never go down four years in a row. Funny, didn’t they say last year that the market almost never goes down three years in a row? Statistically, markets almost never go down the third year of a presidential cycle. They did go down in 1939 but we were entering the Second World War and I guess the market didn’t like that. I wonder what the market is going to do when we wage war on Iraq.

Wall Street can pray and prognosticate all they want. The problem is, God doesn’t care which way the markets move, though I’m told that if Jesus lived today he wouldn’t drive a SUV. I’m not sure this is true but he probably would stay away from Ford and GM stock.

Automakers say they don’t see a recovery until 2005. I guess all those cars they’ve been giving away haven’t helped the ol’ profits. Remember when companies made profit? It seems like just yesterday.

Back to the question of what the markets should be expected to do this year. Before I tell you what the market SHOULD do, let’s briefly look back at 2002 and see how it shaped up. One word sums it up: Painful.

–    The Dow lost 17%
–    The S&P 500 lost 23%
–    The NASDAQ lost 38%
–    The US dollar lost 18% against the euro
–    186 companies filed for Chapter 11
–    Five of these were the largest Chapter 11s in history
–    The Big Five became the Big Four—-and counting
–    The average mutual fund was down 27%
–    The Buy and Hold theory died
–    Abby Joseph Cohen was wrong again
–    Japan didn’t fare better
–    Germany did worse
–    Americans sold more equity in their homes to buy do-dads
–    Real estate held up—again.

Where do we stand today, at the beginning of 2003? The S&P 500 is valued at least twice what it SHOULD be. The P/E is in the range of 28 to 40, depending on who you talk to and how you calculate it. Wouldn’t you think Wall Street would adopt a standard for calculating a company’s P/E ratio (does it represent forward, trailing, operating, core, pro-forma, or just made up earnings?). Remember pro-forma? My first prediction: As long as we still hear companies using the word “pro-forma,” we have not hit the bottom.

Bull markets are not born out of a P/E somewhere above 28. That’s where they die. Historically speaking, the average P/E for the S&P 500 has been around 17. That is the average, which means half the time below and half the time above. I’ll let you do the math.

I’m sure everybody knows this, but just in case you haven’t heard, we are in a long-term bear market that we entered three years ago this March. Prior to that we were in an 18-year bull market. That makes for a total of 21 years. To all the talking heads that say we are coming out of this bear market I say, “What are you selling?” Bull markets lasting 18 years do not get corrected in three years. I don’t care how much Greenspan lowers interest rates or GW Bush lowers taxes, the market needs to correct, as it always has.

But just because we are in a bear market doesn’t mean you have to lose money. It means you have to start thinking. The problem with bull markets is that no one ever learns how to invest. Seventy five percent of stocks go up, so everybody is right all the time. The only problem is what happens when the bull market becomes something else.

We can all agree that times are different three years after the top. The days when everything went up are gone and the time to learn about investing is not quite in vogue, but it will be soon. Main Street needs to touch the hot stove of losses a few more times to understand that the mistakes are real.

Here are my predictions for what SHOULD happen in 2003 (not to be confused with what will happen). Let me know if you hear of someone who does know what will happen—I’ like to meet that person.

1 – Gold will rise past its current price of $350 an ounce. You can play this by buying a gold fund or individual stocks.

2 – This year will be home to at least one, if not two, fierce bear rallies. If you choose to play these, use stop losses, protect your profits and don’t buy on the dips. That was so in 2000. These rallies are a good time to get out of some of the bad stocks you bought in the late 90’s. I’m sorry, but Lucent Technologies is not going back to $70 before 2015.

3 – Interest rates will definitely not be lowered more than 1/4 point. With inflation at 2% and our money markets getting 1.5%, the real rates are negative 1/2%. The Fed can’t lower them much more before we start looking like Japan. The top of their stock market was in 1989. It’s been down ever since.

4 – Look to China for good investments this year. They are going on a spending spree to keep their 7% growth alive. You can play this with a China Country fund or individual Chinese stocks that trade on the US markets as ADRs.

5 – Bush will lead the US to war, not because he has to, but because he cannot back down even now. The whole world is watching and he’ll lose face if he stands down.

6 – Companies looking to increase their stock price will start giving dividends. The problem is, just because a company has enough money to give a dividend, it doesn’t mean you should invest your hard earned cash in it. If you do invest, set a stop loss of 25% —take your profit, and don’t be greedy.

Perhaps 2003 can be the year of learning to cut your losses. There is a saying in bear markets: Those who lose the least win.

To managing your loses and letting your winners soar.

With regards,
RC’s Signature