How Long Can This Go On?

By on May 18, 2006

Originally published on:

December 15, 1996

The past week was a tumultuous one for the markets. Any time you get 100 Dow point moves in either direction, it is a little unsettling. That is, until you see where the market ends up after the week is over. Rarely does the market change by more than 3% in a week. It was no different this time. We started the week out at 6382, and ended it at 6305, for a loss of 77 points, or 1.2%. Does this signal the end of the bull market? I doubt it, but my prediction of 7,000 by late January doesn’t look likely. The limb I climbed out on is showing a lot of strain. I think from now on I’ll leave the specific market predictions to the “experts” and concentrate on identifying attractive investment opportunities

How Long Can This Go On?

I received a question awhile back from a reader. Unfortunately, I either misfiled it on my hard drive, or forgot to click the “O.K.” button when I was saving it. Consequently, I never replied because the name of the sender was lost.

The question was something regarding the inflow of money into stocks from monthly allotments into retirement plans. The reader wondered what kind of effect this inflow would have when the eventual market downturn occurred.

First, let us look at the potential money coming into the market. Of the total population of the U.S. (250 million, or so) the baby boomers between the ages of 35-50 probably number about 60 million. If the average boomer invests $3,000 a year in the equity markets, this comes to a total of $180 billion per year. Divide this by 12 and you get $15 billion per month. This is close to what the monthly net inflows into mutual funds have been this year. This does not include those investors from ages 20-35, or those over 50, which make up a good chunk of the population, but on average, probably only invest a net $500, or so, a year into stocks. I recently read that investors have been placing about 50% of new money going to 401ks, IRAs and other plans, into equities. The chunk earmarked to stocks will, over time, probably approach 75% as the performance numbers for 1996, and prior, get more press.

It takes a fair amount of inertia for an investor on an automatic withdrawal plan to change the allocation of their investments. They either have to fill out a form or make a phone call to change the distribution of their monthly allotment or current allocation. This being the case, the likelihood of a massive shift to a lower equity allocation is slim. I am confident that the majority of baby boomers wish their allocation to equities was higher, but have been afraid to change it because the market has moved up so much. I feel it is much more likely that investors will move to a heavier equity allocation if stock prices move down. This is probably the main reason the downturns we have seen since late 1990 have been historically short and shallow.

The strength of the market will most likely continue for quite some time, not because stocks are cheap, but because demand for stocks will far outstrip supply for at least the next five to ten years. This doesn’t mean there won’t be bumps along the way, however, the demand will be there to soften the blow, like a super heavy duty shock absorber.

S&P 500 Takes the Lead

The five year performance of the aggressive portfolio was recently surpassed by the performance of the S&P 500 over the same period. This occurred mainly because November 1991 was a good month for the aggressive portfolio. That month dropped off the calculation because it is beyond the five year mark. Over the past month, the aggressive portfolio trailed the return of the S&P 500 by a small margin, so now the S&P 500 leads in the absolute return column on the “performance” page. On a risk adjusted basis the aggressive portfolio is performing admirably since it has had an average cash position of 22% over the past five years.

This turn of events has not made me consider giving up on the Tactical Timing System. I realize that buying and holding is not a bad strategy, especially in the market so far this decade. However, this doesn’t mean that a timing system will always be ineffective. Although volatility is probably going to remain relatively low for quite some time, there may be some unforeseen events that “shake things up” from time to time. Any market gyrations above the norm should give the Tactical Timing System an advantage over the buy and hold crowd.

Portfolio Holdings Update

Utah Medical Corp. (UTMD) recently announced they would move their listing from the NASDAQ to the NYSE. The Company said that its shares should begin trading on the NYSE in a couple of weeks. This will help the stock get a little more recognition.

Shareholders recently approved the merger of Diamond Shamrock Inc. (DRM) with Ultramar Corporation. The new name of the company will be Ultramar Diamond Shamrock Corporation.

On December 3, Bristol Myers Squibb (BMY) announced a two for one stock split in the form of a stock dividend. The stock dividend will be paid in February 1997.

Recommended Allocations

The aggressive portfolio is invested in 90% stocks, 10% cash. The conservative portfolio currently is 70% stocks, 30% cash.

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