William Creekbaum column: Mark Twain has insightful comments on the markets
For the Nevada Appeal
“History doesn’t repeat itself – at best it sometimes rhymes.” Mark Twain may not have been a stock-market maven but, surprisingly, his wit and wisdom, as per the quote above, may offer some guidance for today’s markets.
Hearkening back to the first “once in a lifetime” bear market of this decade – the tech bust – a miserable 2002 was followed by a weak start to 2003. However, after a retest of the 2002 lows in March 2003, the market had a classic rebound. By year-end, the Standard & Poor’s 500 rallied 41 percent, and the more speculative Russell 2000 surged 63 percent.
Six years and one more bear market later, we’re seeing much the same pattern. After plunging 37 percent in 2008, and another 25 percent until the March 9 low, the S&P 500 has earned about a 65 percent total return. The strongest returns came from the “high beta” stocks, which typically are low-quality stocks with high debt-to-equity ratios, little or no dividends, and low market share.
At the sector level, much like the worst-to-first rebound in tech stocks in 2003, the financials that were decimated in 2008 generally led the market higher in 2009, logging 132 percent from the low. It’s enough to make you wonder: “If 2009 equals 2003, does that mean 2010 will equal 2004?”
“Get your facts first, then you can distort them as you please.” With all due respect to Mr. Twain’s sage advice, I’ll do my best to minimize any distortion.
But here is a fact: The small-cap and high-beta rally of 2003 gave way to significant outperformance by larger-cap and low-beta stocks in 2004. Despite the “hair of the dog” tech-led rally in 2003, tech’s momentum was not sustained in 2004.
This time around, the spotlight will fall on the financial sector. Will the sector that led the market down and then back up follow the same path as tech, only to flatline in 2010?
Henry McVey, Morgan Stanley Investment Management’s head of global macro and asset allocation, points out that tech stocks went from high-beta leaders in the late ’90s to woeful laggards from 2000 to 2002 and were flat in the 2004 to 2007 economic recovery. Similarly, he argues, financial stocks are now likely to transition from high beta to “boring beta.”
The deregulation boom that ignited much of the volatility in the financials has come to an end, in our view. Moreover, the disinflationary trend that bolstered financials earlier in the decade has also run its course. If we are correct, the financials are apt to be middling performers during the next few years.
“Apparently, there is nothing that cannot happen today.” Though commentators often describe the current market cycle as unprecedented, I believe that there are probably more historical similarities than differences. For example, the third and final “once in a lifetime” bear market that many veteran investors will recall was the 1973 to1974 downturn. It, too, was followed by a high-beta “junk rally” with remarkably positive market breadth – 87 percent of S&P 500 stocks gained ground in 1975 – before giving way to a more normal trading pattern.
Applying Twain’s statement to today’s world of extraordinary financial stimulus, ballooning government deficits and a multitude of geopolitical risks, just about anything could happen for the rest of 2010.
Unlike Twain’s Hank Morgan – the Connecticut Yankee hero who traveled back to King Arthur’s court – I expect in 2010 to be transported back to an equity market that looks a lot more like 2004, a year in which the S&P 500 gained a historically normal 10.9 percent. As difficult as this “lost decade” has been for U.S. equities, such a return to normalcy would likely be welcome by most investors.
• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.firstname.lastname@example.org or 689-8704.