Thursday, September 9, 2010

Stocks Stuck in 15 to 25 year ranges

Interest rates may be stuck but so may stocks

On many occasions I have said that I felt that the Federal Reserve was on hold till at least 2013. Recently I came across some research that suggests that stocks may be in a similar holding period.

The periods of flat returns can run as long as 15 to 25 years. We started our correction in 1999 with the Dot Com bubble burst. If we take that shorter view of 15 years then we are 11 years into the holding period.The chart to the left shows what has happened when we have had many years of flat returns on common stock. As the text to the left shows, these periods can run to as much as 25 years. These periods are not without opportunity but timing has to be perfect to trade for profits. 

Just about the time I think the Fed might start increasing interest rates might be the time to buy stocks. That is not to say that opportunity does not exist to make money in stocks. You will just have to be quicker about your buy and sell decisions.

We have talked in the past that the last 10 years has been the lost decade for common stocks as measured by the S&P 500. The average annual return for the last 10 years on the S&P500 is minus 2.9%. If we are in store for a minimum of 4 more years of stocks being stuck then dividends are very important. If the investment capital is going nowhere in terms of price then the dividends have to carry the load.

Being paid while you wait will be an important strategy.

Dan Perkins

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