Stocks: The Long View

There's much wailing and gnashing of teeth about the fact that stocks are hitting new crisis lows: every downmove from here on in is likely to be obsessively followed by the financial press, much more so than the decline from the January "high" around 9,000 on the Dow and 930 on the S&P. Think of it as a poor man's technical analysis: while there are relatively few stories talking explicitly about "resistance" at the November lows, new lows are just as compelling, from a journalistic perspective as new highs -- and just as meaningless.

The fact is that prospects for the economy are much worse than they were in November. As such, it stands to reason that stock prices should be lower than they were in November: if they were much higher, and the Dow was still above 9,000, that would be the real news, since it might imply that the November lows were panic-driven rather than rational.

Looking forward, I fear we're going to get a lot more of these headlines. This is as good a place as any to point out an excellent blog comment from "bearfund" over at Seeking Alpha, which deserves greater dissemination. He or she says that the long rise of the stock market between 1950 and 2000 might well have been anomalous, and that there's no reason to expect that trend to continue (DCA is dollar cost averaging, to which I'll return later today):

The past 50 years are anything but ordinary, especially for Americans... A far more typical lifetime includes periods of war (in which losing in a way that forever alters one's lifestyle is a real possibility), hyperinflation, depression, and so on, intermixed with occasional booms and peaceful interludes. The sheer size and liquidity of today's developed-world financial markets is itself an exceptional result of an exceptional period of political, military, and economic stability.
In order to provide good advice, you need to have a reasonable understanding of what the economic universe is going to look like for the next 30-75 years. No one does, of course, but we can make reasonable assumptions and act on them. The most reasonable assumption to make is always "reversion to the mean." But when an advisor born in 1950 thinks about "the mean", he or she is making a lot of assumptions based on a truly exceptional period in history. The cold reality is that "the mean" is very mean indeed... how confident are we that avoiding debt, saving US dollars, investing some of them in equities, and DCAing into those investments is a sound strategy? That strategy worked spectacularly well from 1950 to 2000. It would not have worked very well at all from 1900 to 1950.

There's a very good chance that the stock market won't decline in nominal terms for the next 40 years. But the very fact that we're so obsessed with it is worrying. A world where people obsess over one-day movements in the Dow is not a world where stocks feel like a remotely safe investment: it's a world where they're a high-volatility gamble.