Long bear market for stocks not yet over

Long bear market for stocks not yet over


Equity investors can be forgiven for wishing that the third quarter would last forever.



By Edward Hadas, Breakingviews.com

Published: 3:47PM BST 01 Oct 2009



Stock markets ignored the deep recession during the last three months, rising by double-digit percentages almost everywhere except Japan. The MSCI World equity index was up 15pc.



That was enough to bring a definitive end to the bear market which started in 2007. But the long bear market for stocks – the one that began in 2000 – may not be over yet.



For the last decade, stock markets in fact have underperformed the economy. While retail prices and real GDP have risen at a 2-3pc annual rate in most countries, most indices are still at levels seen in 1998 or 1999.



Stocks were a bargain when markets bottomed in March – driven down by a combination of fear and squuzed liquidity. Now, though, the case for buying is much less clear.



The global stock market is selling at 14 times expected 2010 earnings, according to Société Génerale estimates. That is not particularly cheap by long-term standards. And those earnings expectations rely on assumed improvements in profit margins. Unless the recovery takes a sharp V-shape, earnings could disappoint and drag down stocks.



Equity investors taking the long view don’t have too much to worry about. Bear markets don’t last forever, although they can go on for a long time if Japan is any guide. The recession will not continue indefinitely. As long as deflation is averted, stock prices should be up substantially a decade from now. But that does not mean stocks will rise in a straight line from here.



Holders of government bonds, the apparently safer alternative to stocks, have much more to fear. Yields of around 3.5pc on 10-year paper leave almost no room for unexpected inflation. But with central banks and governments all pushing hard to get money flowing – including some interventions that keep bond yields down – the risk of an inflationary outburst is high.



Investors may not like the notion that stocks aren’t great but bonds look worse. There are grim periods, though, when almost all investors do poorly. Despite a few good months, this may be one of them.

http://www.telegraph.co.uk/finance/breakingviewscom/6251374/Long-bear-market-for-stocks-not-yet-over.html