by Peter Bower
Guest Columnist
Market eras are most clearly seen and best defined in retrospect; we can now clearly see that the last decade was a bear market period for stocks. It started with the end of the blow-off of the dot.com bubble and subsequent decline and ended with the collapse of the debt bubble. In between the two bursting bubbles, the market recovery was marked by declining price/earnings ratios; a clear bear market characteristic.
Bear market decades are rare, but others occurred in the 1930s and 1970s. Interestingly enough the ten subsequent years were great for stocks. The 10 years after 1939 showed stock returns of 9.2 percent and after 1982, when the bear market of the ‘70s finally ended, a return of 19.2 percent.
It is natural for investors to get rattled by bad times and seek safety. The current flight into bonds is a case in point. Interest rates haven’t been this low since 1957. After that, rates and inflation increased for the next 25 years producing poor or negative returns for bond investors — a 25-year bear market for bonds.
Since 1982 bonds have been in a bull market. Rates and inflation had peaked and began a protracted decline culminating at the very low rates of today. With the Federal Reserve at a current policy of 0 percent to .25 percent policy for Fed-funds, there simply isn’t any room to go lower. The next trend simply has to be higher for interest rates. This may imply higher inflation as well, but some inflation is needed. Economies that run at rates too close to zero, run the risk of falling into deflation. Deflation is very difficult to cure and is very damaging to an economy. It erodes collateral values which freezes-up lending which in turn stunts economic growth. It is much better to have 2-3 percent inflation as this is manageable and keeps things moving forward.
The new opportunities, coming out of a decade long bear market, are in stocks. Expectations are low, price/earnings ratios are reasonable, and the companies are themselves in good financial shape and in many cases doing business in many fast growing markets around the world. As in every market, some will do better than others. We believe that companies participating in fast growing foreign markets, green energy, clean water, Internet services, and/or the mobile Internet will perform the best.
Every era has a backdrop of risks. Many investors can recite a litany of them and they include budget deficits, potential geo-political shocks, increasing regulation, higher taxes plus many more. These are nothing new and have been present in some combination during previous bull markets. Few can or do recite positive factors. Bet against this crowd.
At Riverplace Capital, we believe we are at the early stages of a multi-year advance that is a new bull market. The businesses that have survived and thrived through the past 10 years are in incredibly good shape. Every problem is potentially a business opportunity. Don’t lose sight of that possibility and keep an open mind.
Peter Bower — chairman and CEO of Riverplace Capital Management, Inc. — has over 30 years investment experience and co-founded Riverplace Capital Management (RCM) in 1998 with Charles M. Thompson Sr. who retired in 2000. As head of RCM’s Investment Management Committee, he provides strategic guidance for all RCM activities, with a focus on the firm’s investment management model, investment process, institutional portfolio management and analysis. Prior to forming RCM he joined St. Johns Investment Management Co., Inc. as a Principal & Senior Vice President. Bower began his career with Merrill Lynch as Vice President & Financial Consultant where he served for 18 years. Bower has a BS degree in Quantitative Systems and a Masters in Business Administration. He has held NASD Series 7 Registered Representatives and Series 8 General Securities Sales Supervisor licenses.