I don't know where you stand on this but I'm kind of looking forward to 2003 being a relatively normal year in the stock market, or is that an understatement? When I talk about normal, what I'm really eluding to is a stock market index advance of about 10 percent, including dividends, of course. That would be nice.
Look, we've been in the doldrums for the past three years--hardly a normal period--and from 1995 up to and including 1999, the Standard & Poor's 500 index rose more than 20 percent each year. That wasn't normal either, although we liked it immensely. Heck, in 1994, the market advanced only one percent--again, not normal.
When was the last normal time we had? Try 1993 when the S&P brought home a 10 percent return.
Speaking a few weeks ago in Scottsdale, Arizona, to members of the Investment Management Consultants Association, Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School, believes that stocks should have a fairly normal (there's that word again) year in 2003 if they generate a total return somewhere around that 10 percent mark. Actually, he has tracked the stock market way back to 1802 and says that the average return has been a little over six percent a year--once inflation has been subtracted.
Can we hit that 10 percent? "For the first time in seven years, stock returns now lie below their long-term trend line," Siegel says.
As to this year, going January through April, the S&P 500 advanced four percent. So, I figure that if it can stay the course during the balance of the year, and if you drop in the market's dividend yield of two percent, then there could be a total return of some 10 percent. Now, that's normal, eh?
Siegel admits that stock valuations are rather high from a long-term perspective, but presently, stocks in the S&P 500 are trading at an average price-earnings ratio between 20 and 23, based on Siegel's estimate of 2003 earnings for those companies--well above the market's long-term average p/e of 15. However, he says that a higher number is justified by certain factors. These include declining tax and interest rates, low inflation, and good liquidity in today's financial markets. "These factors mean p/e ratios should average in the low 20s," he notes.
Keep in mind that in 1999, a return of 10 percent would have seemed measly. Nowadays, you would greedily take it, right? But as Siegel likes to point out, returns of 10 percent--or even 6.7 percent if you use his after-inflation calculation--are fairly common.
However, after all is said and done and we have reflected on what has transpired over the past decade, wouldn't it be nice to get back to some sort of normalcy--whatever it may be?
