A: There's incredible partisanship, which is obviously dysfunctional. When we had the debt ceiling debate and resulting credit downgrade in the summer of 2011, stocks fell about 20 percent in short order. But there was no comparable decline leading up to the recent fiscal cliff deal. Washington has found a new way to negotiate and the markets seem to be getting used to it.
In coming months, I suspect we'll have more last-minute compromises that won't make Republicans or Democrats happy, but will advance the ball a little bit. It doesn't matter much for corporate America, and for the market and average consumers. The economy and the strength of corporate profitability is what really matters.
Q: What do the stock market fundamentals tell you now?
A: Long-term, the case for stocks is great. We've got a low starting point for the market, after we've gone through a period of about 13 years where the market has generated no real returns based on stock price changes. Stocks have generated only a modest return if you factor in dividends. About a dozen years ago, stocks were trading at an average of about 26 times their expected earnings. Now, they're trading at about half that level, or 13 times expected earnings, so stocks are relatively inexpensive. Earnings have roughly doubled over the last decade, but the market has basically been flat.
Q: How do you explain the huge sums withdrawn from stock funds the past few years, and the huge amounts that have gone into bonds?
A: It's not surprising after what we've been through over the past dozen years. We've had the Sept. 11, 2001 terrorist attacks, wars in Iraq and Afghanistan, oil hitting $100 a barrel, a housing market meltdown and a financial crisis. There's been a lot of volatility in the stock market and people have been burned. The problem is that people tend to sell at the wrong time and lock in their losses, which makes it even worse.
Q: Can those investors get it right in the coming years?
A: Maybe not. My biggest worry is that 2008 was such a damaging experience to the psyche of America, especially for investors who were potentially less sophisticated and for those close to retirement. Their behavior has been influenced for a long time and possibly permanently. So I'm a little worried that as the market keeps rallying and investors perceive the market as less risky, the people who got out four to five years ago will think it's OK to get back in. I hope that people will come back to stocks, so that they're a consistent part of their portfolios over time. They're an asset class that's shockingly out of favor, despite good returns.
Questions? E-mail investorinsight(at)ap.org