It might be realistic to be pessimistic about the prospects for big stock market gains in 2009, but what's the point? Life is so much more enjoyable over here on the sunny side of the street not to mention the exhilarating "high" we get when we tell someone what we know they want to hear. So, let's indulge ourselves and look at some facts.
The market by all appearances seems to have settled at some type of a bottom for the moment. Sure, there are some economists who point out that there are more shoes to drop, and the press picks these stories up without hesitation. However, economists have a bias. They get faulted for not predicting a downturn, but they get ignored and keep their jobs when downturn predictions turn out to be false and everyone's happy. If you are an economist with a family to support, your path of minimum regret should be obvious.
For my part, I started with www.intrade.com, the betting site that has been remarkably accurate at predicting future events. Their current odds predicting a recession (on balance) through 2009 is only 30 percent. That means that there is a 70 percent chance that 2009 will wind up with a healthy economy, and that's a fact that offers encouragement. If I understand facts correctly, total consumer spending for 2008 (excluding fuel) was only about 2 percent less than that of 2007, and 2007 was about 2 percent more than that of 2006. In round figures, that means we are spending today at a level we were at in 2006. To any glass-half-full guy, it looked like even in the holiday season we spent over 90 percent of what was spent the previous year. That hardly feels like a doomsday scenario to me. The stock market tends to lead the economy out of a recession by six months. This is because stock prices represent the discounted future value of years and years of corporate earnings. An immediate year of earnings caught in an economic downdraft is not that important when weighed against the long-term expectations of many future years. A light at the end of the tunnel is all the market needs to spark a surge in value. However, investors get "spooked" by today's events which overshadow the long-term health of companies. The collapse of financial markets has been especially scary, although history may judge this catharsis as the best thing that ever happened to the financial community.
How healthy are American companies? The majority of public companies actually made more money in 2007 than they did in 2006. As for the people who were inclined to sell stock, it looks like they have pretty much finished. Thanks to those who dumped stock at any price, the rest of us have had to endure a 40 percent drop in value at least on paper. But when markets rebound, here's what has happened in the past: In the first twelve months on average, they have risen by 38 percent. In the next twelve months, the rise has been 11 percent, and then finally 4 percent in the third twelve-month period. For example, an original $100,000 dropping to $60,000 then recovers to about $96,000 if history repeats itself. These figures do not include reinvested dividends which, thanks to bludgeoned stock prices, are at all-time high percentage rates. Add about 4 percent to the above rates, and our final recovery number is $106,000 in three years.
The pessimist dwell on the discouraging thought that whenever you lose 50 percent on an investment, it then needs to double (100 percent return) to get back to equilibrium. Wrong. Died-in-the-wool optimists know that compounding the above gains over three years and adding reinvested dividends brings the doubling factor to a more palatable 65 percent. Given that the speed and magnitude of the market drop took virtually everyone by surprise, it is not unreasonable to expect a mirror image on the upside. Major portions of those 38 percent first-year market moves have occurred in the early weeks of the market's turn, so it is better to be a little early than a little late a purely academic concern for buy-and-hold investors.
Is this a great time to be an investor, or what? Those of us still adding to nest eggs can find delight in the fact that "there really is a pony in here somewhere." In spite of what we read, the world is not going to hell in a handbasket. And, those inspirational recovery figures are the averages for the last four "crashes."