As many of us well remember, the economic picture in 2002 was not pretty.
America was in the midst of recovering from the horror of 9/11, and we were preparing to go to war against Iraq. The stock market reflected a worried populace, and prices had plunged.
The S&P had declined -20% in the seven months ending July 31, 2002, and was down almost -40% from its peak in the spring of 2000.
As it turned out, however, the summer of 2002 was a pretty good time to invest in stocks.
If you had invested $100,000 in the S&P 500 at the end of July 2002, and reinvested the dividends, your portfolio today would be worth nearly $185,000 - nearly doubling your money in 10 years.
Not a bad return during a period which many people now call the "lost decade" for stocks.
Investor sentiment is almost always bearish at market bottoms. While I'm not sure we are poised for the start of a new bull secular bull market, contrarian investors should be encouraged by the continuing stream of negative articles regarding stock investing.
Consider Joe Nocera's column in last Saturday's New York Times, in which he compared the equity markets to Frankenstein:
As Jason Zweig pointed out recently in The Wall Street Journal, over the last 13 months, $136 billion has been withdrawn by investors from stock mutual funds. No doubt part of the reason for the withdrawals is that investors are unhappy with their returns. But I suspect that an even more important reason is that between the glitches and the scandals, people have simply had it with the market....
One wonders if Wall Street itself is beginning to question if it can rely on the monster it has created — and which it no longer seems able to control. In the immortal words of the screenwriter William Goldman, “Nobody knows anything.” He was talking about Hollywood. But the same could be said today for Wall Street and its fixation with computerized trading.
Or Andrew Ross Sorkin in today's Times:
Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn’t made a buck....
Individuals are worried that it’s hard to make the right bet and worried that the market is rigged against them. Much of this is an outgrowth of woes of Wall Street’s own making, like insider trading cases or market manipulation scandals. Those situations are partly why individual investors don’t believe they stand a chance against the professionals.
Even bond guru Bill Gross has jumped on the "equities are dead" bandwagon:
Last week, the manager of the world’s largest bond fund at Pacific Investment Management Co. in Newport Beach, California, compared long-term returns from equities to a “Ponzi scheme” and said returns of 6.6 percent above inflation, known as the Siegel Constant, won’t be seen again. “The cult of equity is dead,” Gross, 68, said in an Aug. 2 interview with Betty Liu on Bloomberg Television.
The difference between current market sentiment - and what historic returns have actually been - has never been wider, in my opinion.
The fact that a large segment believes that bonds are multi-generational lows are a better investment than stocks trading at reasonable valuations (and offering dividend yields that are in many cases higher than comparable corporate bonds) should sound the "Opportunity Alarm" for anyone with a longer term horizon.