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It Might Not Feel Like It, But Things Are Going Our WayBy
Wednesday, January 11, 2012
Last year was the perfect example of something I've been talking about since 2009.
Stocks ratcheted wildly up and down. And it probably felt pretty bad to be a long-term investor. But once you understand what was really happening... you're going to feel better.
Let me show you why...
In 2011, the market value of U.S. stocks went nowhere from the first trading day, January 3, to the last trading day, December 30. And I mean absolutely nowhere. The S&P 500 started the year at 1,257.62 and ended the year at 1,257.60.
I'm sure I'm not the first person who's pointed that out to you. But you might not have heard a much more important piece of news...
While the market value of the S&P 500 was going absolutely nowhere, its valuation was plummeting. S&P 500 trailing 12-month earnings (through September 30, 2010) started last year at $79 a share and ended the year at $94.64 per share (through September 30, 2011).
That's 20% earnings growth.
So it would make sense for the index's valuation to at least stay the same if not rise, wouldn't it? But that's not what happened.
U.S. stocks started the year at 15.9 times earnings, and ended it at – are you ready for this? – just 13.3 times earnings. That's 20% earnings growth simultaneously with a valuation plunge of 16%.
Think about that. Investors were so mesmerized by the European crisis, the Japanese tsunami and ensuing nuclear disaster, and other bad news, they weren't paying the least bit of attention to what was really happening to the companies they were selling. The European crisis meant absolutely nothing to the real world results of American businesses. The Japanese tsunami barely registered in U.S. public companies' results.
Nothing prevented U.S. companies from growing earnings 20%, on average. But Mr. Market decided stocks were worth 16% LESS.
I believe this is how it'll be for the next several years. It's part of the "sideways market" I've been constantly writing about for years.
Since 1900, there have been three sideways markets: January 1906 through July 1924, March 1937 through January 1950, and January 1966 through October 1982.
A fourth sideways market has been underway since March 2000.
Since then, stocks have ratcheted up and down, with deep bear market dives and soaring bull market recoveries. Over the last 12 years, the overall market has gone nowhere, peaking twice – in March 2000 and again in October 2007 – and hitting two major lows – in October 2002 and March 2009. And since March 2000, the overall valuation has plummeted, from around 40 times earnings to today's level at 13.3 times earnings.
What's happening in the stock market may feel bad. But it is good for long-term value investors.
We want the sideways market to keep making stocks cheaper. We want those 22% drops, like we saw this year, to create new bargains for us. I'm using these crisis periods to tell my readers to load up on stocks. All through August, September, and October, I was highlighting the best values in our model portfolios... like buying Microsoft for less than 10 times earnings.
For the sideways market, I particularly like buying cheap, dominant dividend growers. These companies weather tough times better than their competitors do. And if you can't depend on a big upswing in the market to make money, you need to make sure you're getting paid through dividends and dividend growth.
During this sideways market, we're going to see plenty of opportunities to load up on these companies. Stocks will swing up and down. Every so often, the downswings will make high-quality stocks reasonably cheap – as they are today. Folks like me will buy. And then the bargains will disappear and make you wealthier as the market recovers.
It might not feel like it, but things are going our way. All you have to do is know the value of great businesses, stay patient, and buy them when Mr. Market goes into panic mode. Their steady cash flows and dividend growth will take care of the rest.
Good investing,
Dan Ferris
Further Reading:
World Dominating Dividend Growers are companies at the tops of their industries. They gush free cash flow and pay out ever-increasing dividends like clockwork. Best of all, Dan says, they are "the closest to a sure thing that exists in the stock market." Get the full story on these must-have investments here: How to Find Extraordinary Income Streams That Always Go Up.
Review some of Dan's favorite "World Dominating Dividend Growers" here: cigarette maker Altria, household product manufacturer Procter & Gamble, and software giant Microsoft.
Market NotesA BIG BREAKOUT FOR A CRUCIAL MARKET SECTOR We're seeing upside breakouts all over the place. That's the biggest thing to take away from the week's trading action...
Regular DailyWealth readers are familiar with the concept of a "breakout." It's simply a price at which an asset "breaks" into fresh price territory. A breakout can come on the downside or the upside. But whatever the direction, no trend can start without one. They act as a sort of "starter's pistol" for rallies and declines.
This week, we've seen a handful of important upside breakouts. The broad S&P 500 index, for example, just staged an upside breakout to hit its highest level in five months. Regional bank stocks are staging upside breakouts. So are defense stocks and homebuilder stocks. But you'll see one of the most important "breakouts" in the chart below...
Around Christmas, we noted how the positive price action in transportation stocks – railroads, truckers, airlines, and shippers – was a good sign for those "bullish on America." The idea is that if the shippers of goods are enjoying robust profits and share prices, the economy can't be doing that badly. This week brought more good "price news" for the transports. The big transport fund just broke out to its highest high since August. For now, the trend is UP... trade accordingly!
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