Contrarian Edge: The Stock Market, The Economy, Possible Outcomes, How to Invest
Investors tend to think of the stock market as rising or falling. However, returns over the past 100 years indicate that markets tend to have long-term bull markets, and then long sideways periods.
Those sideways periods have bear markets in them, but may be part of a 10-15 year period of flat returns overall. The bull markets, likewise, tend to last for about 15 years as well.
Market cycles would be less pronounced if valuations didn’t change. However, depending on how fearful or greedy investors are there can be big swings in returns. Without those swings, stocks would likely return close to 4-5 percent annually, with another 4-5 percent in dividends.
Right now, market valuations remain high, even after coming down from last year’s crash. That’s due to the inverse relationship between asset valuation and interest rates.
That points to a sideways market, as valuations need to continue to come down. The good news is that besides falling prices, improved earnings can also help improve a company’s valuation.
We will likely see both at play as the economy continues to work through the distortions caused by Covid and the government response to it.
But with rising interest rates, and with so much short-term debt resetting at higher rates, investors shouldn’t get overly bullish yet.