Average Returns Expected for Stock Market Investors

By: Paul_J_Nolte

What else is there to add to a historic week (and not in a good way!)? The markets declined, just in the month of October a percentage roughly equal to the crash in 1987. All the various acronymed bailout packages have not done the trick and confidence among banks is very low. We keep hearing of lack of lending between banks, a lock-up in the bond and money markets as well as commercial paper markets. Industry as we know it could come to a screeching halt without the grease of loans to buy goods for inventory or to make daily/weekly cash commitments.

The economy matters little at this time and it is all about liquidity – who has it, where can it be had and at what price. And as the price rises, fewer are able to afford the borrowing. Over the weekend the major industrialized countries all came together to hammer out a concerted plan providing the needed liquidity to allow the markets to function. The hope that all the countries would put together a plan allowed the markets on Friday to cut their losses, but they remain nearly half of their levels of just a year ago with market losses well in excess of whatever the government has pledged or added to the financial system. Fear and cash are king in today's market. But we are becoming convinced that among the rubble are opportunities.

It should come as no surprise that many of our indicators are on their bellies, awaiting some indication that the world will not end and thereby providing the tinder for a market surge. The rubber band has been stretched by the persistent selling and is due to snap back on the hint of good news. A couple of notes on how low things are today. The market is trading below its 200-day average by the largest amount since the crash of '29. Our valuation measure is showing an estimated return over the coming 3-5 year period of mid-teens, the highest level for that indicator since the early ‘90s.

While all the indicators do not mean the market is turning around tomorrow, we are of the belief that the odds are now in our favor that the next few years should provide above average returns for stock investors. As a result, we will be using available cash and bond proceeds to increase our equity exposure over the next few weeks/months to take advantage of what we believe is a good long-term buying opportunity.

The bond market is essentially broken. Trying to sell a good quality corporate bond or heaven forbid a financial related issue is difficult at best. This is also true of municipal bonds, as investors have fled these issues in favor of Treasury issues that provide the needed liquidity. This is the reason for bond yields on Treasury paper held for six months is just a hair over 1.3%.

The Fed cut rates by a half a percent earlier in the week and are expected to do so again before yearend – just to keep the juices flowing for the credit market. As a result, the bond model continues to point to lower rates ahead, buying longer dated maturities is getting hazardous for conservative investors. However, for those with an appetite for risk may find some very good bargains in bonds for those willing to accept some volatility in their holdings.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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