A Word on Long-Term Optimism

This article was written by Mike Cintolo on October 17, 2008 on his previous website iconoclast-investor.com.

Just wanted to start with a quick word of optimism about the future of the stock market, and the potential for making money in the months and years to come.

I was pleased to attend the Contrary Opinion Forum in Vermont last weekend with Timothy Lutts–Tim’s been going for 22 years straight, while this is my fourth or fifth visit since I came to Cabot back in 1999–and it’s always a treat.  This year the foliage was breathtaking, and the weather couldn’t have been better.

In terms of the attendees, as well as the speakers, I would say there were two consensus opinions.  First, the market was likely near a low based on the degree of capitulation being seen (remember, this was last week, when the market was off 20% in a handful of days).  But second, that America’s longer-term future would be difficult.  The reason?  Government debt, interference in the markets, and worries that the current “de-leveraging” of the economy will last for years.

Now, you might think that, since this was a Contrary Opinion Forum, that the views of the crowd would be right on the money.  Usually, however, that’s not the case–the speakers and attendees are human, just like all of us!  And, when most of them think one way, the opposite often occurs.  I’ve seen it happen a few times, and Tim even more so.

But there’s more than just this anecdotal evidence to get excited about.  Consider some numbers from one of the speakers, Steve Leuthold, who manages a couple billion dollars.  When normalizing earnings (taking a moving average, which smoothes out the fluctuations), the S&P 500 dropped to about 13 times earnings last week, well below average and near the 25th percentile of all readings since 1957.

The upshot?  Historically, when valuations have been so cheap, the S&P 500 is actually on the verge of beginning a great long-term advance.  On average, in the 10 years following such readings, the S&P rises 14% to 15% per year!  (In the one-year period after such readings, the average advance is 18% or so.)  This is a historical fact, not opinion.

The reason is simple: Valuations have been generally compressing, from the exuberant bubble days of 2000 to the ultra-pessimistic worries right now.  All during that time, perception has been weakening, so investors have been willing to pay less and less for earnings.

I’m not suggesting that P/E ratios are going to turn around and head back to 2000 levels, but I do believe, given last week’s panic and the year-long bear market we’ve gone through, perception has a LOT of room to increase in the years ahead.  Other studies point to the same thing–the S&P, for instance, has returned just 3% annually (including dividends) during the past 10 years.  After such sorry returns, the subsequent five- and 10-year periods are often terrific.

Time will tell, but just keep these facts in the back of your mind when somebody who is only looking through the rear-view mirror (even if they’re an experienced investor) tells you America’s best days are behind it.

Page Updated: August 4, 2016

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