ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Thursday, December 28, 1995 TAG: 9512290013
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
COLUMN: Ray L. Garland
SOURCE: RAY L. GARLAND
THE STOCK and bond markets must be asking, "What can we do for an encore?" After advancing by more than 25 percent from this time last year, it's a fair question.
In writing this annual financial column the past several years, I haven't hesitated to predict substantially higher prices for stocks. Last year, I said interest rates would be falling and high-yield bond funds were a safe place to earn a fat yield plus a nice appreciation.
One example cited was Putnam's Managed Yield Fund, then trading at a substantial discount to net asset value for just over $11 a share, yielding slightly more than 11 percent. As this is written, it is selling for $13.75, paying only 9.7 percent. Counting dividends, that represents a one-third gain on your money in just 12 months. Do that every year and pretty soon you won't be worrying about the mortgage.
You can't, of course. As far as bonds are concerned, 1995 merely made good the disastrous previous year. And those who bet on the stocks of such old-line giants as Philip Morris, Eli Lilly, Coca-Cola and General Electric did far better - a gain of 50 percent in 12 months.
As for 1996, my hunch is the stock market will soon pause to digest evidence of a possible recession while bonds advance a bit more. But stock prices will continue to be sustained by two elemental facts. First, the United States is still the world's largest and most dynamic economy. Also, by far the safest and most hospitable to capital. Second, there is a river of gold flowing from personal savings, pension funds, corporate reserves and foreign-flight capital that must find a home.
The last recession officially ended in March 1992, just as then-President George Bush insisted, though few in the media professed to believe him. The stock market had bottomed the previous December and has now doubled. Is it time for another recession?
Evidence emerges from the Christmas-buying season that sales were less than robust, though complete data for December may show a picture less grim than initial news reports. Retail is weak, not so much because sales are flat but because so many stores are trying to get a slice. Kmart stock has lost half its value in the past year, and even the stock of mighty Wal-Mart has marked time for some years now, paying a dividend of less than 1 percent.
That illustrates how investors can lose even when backing a very successful company, which is the main reason I like bonds. The trick is to buy old bonds (or funds) at a discount when the interest being paid on new bonds coming to market is high. Sooner or later, the vast majority of bonds come back to par or better.
With both inflation and the deficit under control, and the dollar stable, it's hard to see any basis for rising interest rates. In fact, it isn't hard to find justification for further cuts, which suggests there's still money to be made in bonds.
With about $1.4 trillion in money-market funds and certificates of deposit, Americans have ample scope to consider investing in stocks or longer-term bonds.
U.S. corporations are also flush. The Commerce Department says that pretax profits for nonfinancial companies are now running about $500 billion a year - more than twice the average of the 1980s! And after lagging its chief industrial rivals in the '80s, U.S. investments overseas are once more in the ascendancy.
Such developments prompted one leading economist to say the old rules "are no longer very useful." Of course, whenever the "experts" have predicted a brave new world of ever-expanding prosperity, it has generally meant a crash was just around the corner. But there really do seem to be some new rules. Or, to be more precise, a revival of the old rules that made America pre-eminent in the first place.
Almost alone among major industrial powers, political and economic conservatism never lost an audience in the United States. As recent events in France might indicate, curbing the appetite of the welfare state is easier here than elsewhere. If not always victorious, American conservatives have managed to set the terms of debate and forced liberals to fight a rear-guard action.
It's a big world out there with lots of big players in it. But we might measure our standing by taking note of the fact that 44 of the world's 100 largest public companies are based in the United States.
Because of our vast continental market and stable political system, America remains the investment of choice. There is, I believe, more cause for optimism than we've seen in decades. Henry Luce, founder of Time-Life, was right. It is the American Century, and no reason the next one can't be as well. It's the flexibility, stupid.
If you're young, put your money in an index fund, like Vanguard 500, that tracks the S&P 500. There's no genius at work here. The fund's managers simply buy the common stocks of 500 important companies in proportion to their share of the index. Because there's no army of analysts trying to guess the next Microsoft, the annual management fee is about one-fifth of 1 percent.
If the history of the stock market since 1790 is any guide, you'll do superbly well. If you put $2,000 a year in your IRA from age 30 to 65 and don't touch it, you should be at least a millionaire - $966,926 to be exact, based on the market's historic gain of 12 percent a year. The same money in a bond fund averaging 8 percent would give you $372,204.
Ray L. Garland is a Roanoke Times columnist.
LENGTH: Medium: 97 linesby CNB