Range-Bound at Best: The Long View on Stocks Isn’t Much Better, Says Value Investor
Aaron Task 10 February 2009
On days like Tuesday, after a year like 2008 it’s easy to get caught up in the market’s short-term moves. But when you step back and look at the market from a very long-term perspective, the historic pattern is a steady climb interspersed with very long periods of sideways activity where major averages do very little.
Such was the case from 1996-1982 when the Dow experienced some big up and down moves but was effectively pinned to the 1000 level. Similarly, the Dow was effectively unchanged from 1906-1921.
Vitaliy Katsenelson, a portfolio manager at Investment Management Associates, believes another such period of range-bound activity began in 2000, as detailed in his book Active Value Investing.
The good news, for those long, is Katsenelson does not believe the S&P and Dow are destined to plunge another 30% to 50% as many believe - provided the economy doesn’t totally collapse, dragging earnings down further still.
But the value investor refutes the notion the market is cheap - or at least fairly valued - as a number of pundits and some legendary investors have claimed in the wake of the Dow and S&P’s roughly 40% fall from their all-time highs.
The market is only “cheap” if profit margins are going to return to normal values, which is highly unlikely given the economic environment, Katsenelson says. While 2008 earnings were hit by bank write-downs, the money manger believes 2009 results will be hampered by disappointments from the basic materials sector as the global economy cools.
Furthermore, he notes that periods of abnormally high valuations - as occurred in the 1990s and early 2000s - are typically followed by periods where P/E ratios fall below “average” to around 10 vs. today’s 17-20, based on expected 2009 results.
Against this backdrop, Katsenelson says investors should avoid index funds but he does believe there are opportunities in individual stocks, as we’ll detail in a forthcoming segment.
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Range-Bound at Best: The Long View on Stocks Isn’t Much Better, Says Value Investor
Aaron Task
10 February 2009
On days like Tuesday, after a year like 2008 it’s easy to get caught up in the market’s short-term moves. But when you step back and look at the market from a very long-term perspective, the historic pattern is a steady climb interspersed with very long periods of sideways activity where major averages do very little.
Such was the case from 1996-1982 when the Dow experienced some big up and down moves but was effectively pinned to the 1000 level. Similarly, the Dow was effectively unchanged from 1906-1921.
Vitaliy Katsenelson, a portfolio manager at Investment Management Associates, believes another such period of range-bound activity began in 2000, as detailed in his book Active Value Investing.
The good news, for those long, is Katsenelson does not believe the S&P and Dow are destined to plunge another 30% to 50% as many believe - provided the economy doesn’t totally collapse, dragging earnings down further still.
But the value investor refutes the notion the market is cheap - or at least fairly valued - as a number of pundits and some legendary investors have claimed in the wake of the Dow and S&P’s roughly 40% fall from their all-time highs.
The market is only “cheap” if profit margins are going to return to normal values, which is highly unlikely given the economic environment, Katsenelson says. While 2008 earnings were hit by bank write-downs, the money manger believes 2009 results will be hampered by disappointments from the basic materials sector as the global economy cools.
Furthermore, he notes that periods of abnormally high valuations - as occurred in the 1990s and early 2000s - are typically followed by periods where P/E ratios fall below “average” to around 10 vs. today’s 17-20, based on expected 2009 results.
Against this backdrop, Katsenelson says investors should avoid index funds but he does believe there are opportunities in individual stocks, as we’ll detail in a forthcoming segment.
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