Time to Rethink Stocks?

A recent column by Fortune writer Allan Sloan is ominously titled "Don't expect another bull market." In the article, Mr. Sloan argues that the period from 1982 through 2000 was an unrepeatable stock market party and it's going to lead to a lot of disappointment if investors are anchored too heavily to the returns from that time period.

To a large extent his argument holds -- taking numbers from Yahoo!Finance, I found that the S&P 500 increased around 15% per year between the beginning of 1982 and the start of 2000. This is a far cry from the 7.8% that I calculated for the period from January 1950 and January of this year. Of course the numbers that Mr. Sloan was looking at for his article -- and he does note this -- are fairly particular to the time period he chose. If we shift the range a bit, say, 1987 to 2008 or 1977 to 2008, the annual returns fall and are closer to the longer term average.

But it'd be nitpicky of me to lose the point in the details. The last 20 years have been very good for stocks and individual investors have found there way into the market in greater numbers. This may have led to some over-excitement in the markets and unsustainable valuations.

Yale economist Robert Shiller has collected data (which I've already visited) on the stock market going back as far as 1871 and has calculated the P/E of the stock market based on average 10-year trailing earnings for every month since then. Over the course of the last 100 years or so, this P/E number has spent most of its time ranging from the mid-single-digits to the low-20s. But in 1992, the P/E broke above 20 and made a mad dash to the mid-40s during the DotCom bubble. At the beginning of this year, Mr. Shiller's numbers show us at 24 -- safely down from the dizzying peaks of the DotCom days, but hardly low by historical standards.

So what's ahead? To Mr. Sloan's original point, investors that anticipate easily racking up 15% or greater annual returns may have to readjust their expectations. At the same time, it may be more important than ever that investors take valuation into consideration when making investment decisions. Investors have been reminded on numerous instances that valuation does matter (aside from the DotCom era there was always the Nifty Fifty).

-AvgJoe