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BEING STREET SMART
by Sy Harding
Are Investors' Portfolios Also Near Their 2000 Peaks? May 5, 2006.
With most major indexes at five- and six- year highs, is the severe 2000-2002 bear market now just an unpleasant memory, with investors' portfolios back to being whole again?
The current bull market began in October, 2002. Most of its upside performance took place in 2002 and 2003. It then entered a quite flat trading range. For instance, last year, 2005, the S&P 500 and Nasdaq were up only 2.9%, and 1.4% respectively, for the entire year, while the Dow was actually down 0.6%. This year began with a rally in the first ten days of the year. But then the market struggled sideways for the next several months. As recently as three weeks ago, the Dow, S&P 500, and Nasdaq were all below their levels of four months ago reached on January 11. And even with this latest rally, the S&P 500 and Nasdaq are only 2% and 1% respectively, above their levels of January 11. Not much movement.
However, the Dow has been more positive than the S&P and Nasdaq, especially over the last three weeks, and it is now almost 5% above its level of January 11, and up 8% for the year so far.
Added to its performance in 2002 and 2003, that 8% gain this year has the 30-stock Dow Jones Industrial Average at a new six-year high, and only 1% below its 2000 bull market peak of 11,722. At the same time, the 20-stock Transportation Average is at an all-time record high, well above its bull market peak. The Russell 2000 Index had recovered back to its 2000 bull market peak more than a year ago, and is now well above that previous peak.
However, the portfolios of most investors are still probably nowhere near recovered from their bear market losses.
Unmentioned in the excitement of the new six-year highs, the 5000-stock Nasdaq Composite, the favorite investing area of individual investors in 1999 and 2000, remains a huge 54% below its bull market peak. The Nasdaq 100, which is comprised of the 100 largest non-financial stocks of the Nasdaq, remains 64% below its bull market peak. A $100,000 investment in either of those two indexes near their peak in 2000, is still worth less than $50,000.
Even the 500-stock S&P 500 remains 15% below its bull market peak, while the 5000-stock Wilshire 5000 remains 11% below its bull market peak.
I also looked into the performance of 18 large, conservative stocks that were touted in 1999 as defensive stocks that would hold up well if the market ran into problems. The list includes Abbott Labs, American Express, Bristol Myers Squibb, CitiGroup, Coca-Cola, Disney, General Electric, Home Depot, IBM, Intel, McDonald's, Merck, Microsoft, WalMart, etc.
You probably remember why they were supposed to hold up well, besides being well-established companies. No matter what happens to the economy or stock market "people will still have to eat", or "people will still have to take their medicines", or "in bad economic times folks will more than ever need the discount and do-it-yourself outlets, and the credit-card providers".
However the advice ignores what investors, and particularly institutional investors, don't have to do, which is hold onto stocks when they become over-valued.
The average decline of the 18 'defensive' stocks in the 2000-2002 bear market was 60.5%. How well have they bounced back in the new bull market? None are back near their previous highs, and as a group, more than six years later they are still down an average of 35%.
Another reason why the Dow and S&P 500 being at six-year highs does not mean investors' portfolios have recovered, is that the stocks that make up the indexes undergo constant changes. For instance, there have been 109 changes made in the stocks that comprise the popular Nasdaq 100 just since early 1999, in an index that only contains 100 stocks. Thirty-six percent of the 30 stocks that made up the DJIA in early 1999 are no longer in that index. At the market peak in 2000, technology stocks dominated the S&P 500. In the new bull market it has been financial and energy stocks that dominate the index.
Yet, although the Dow being back to within 1% of its 1990s bull market peak does not mean that the average investors' portfolio has also 'come back', it is encouraging, if the rally can be sustained this time.
The market rallied more than 1% on Friday, in response to the monthly jobs numbers for April coming in weaker than forecasts (raising hope again that the Fed may have to stop raising interest rates).
The market made a similar gain a month ago, when the March jobs numbers came out stronger than forecasts (raising hope the economy was recovering from previous weakness). It was up four of the following five days, but couldn't hold the new highs. It then dropped back over the next four weeks to the low three weeks ago, carrying the major indexes down to below their levels of January 11. It has now been up two of the last three weeks.
If the market can sustain the rally this time, it will be a significant change, as it has been in short-term trading mode all year, responding to each economic number or earnings report as it is released, but unable to sustain moves in either direction for more than a week or two.
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