Home on the (trading) range
The stock market is bouncing in a trading range within a band of about a thousand points on the Dow Jones Industrial Average. When it nears the top of the range, it hesitates like someone fearful of diving off a high board. As fears drive it down, it bottoms out somewhere near 11,000 as unusually reasonable values, particularly on solid blue chips, bring in renewed buying.
This contest between fear and greed is what has made markets fluctuate since their invention. The stock market’s long-range trend remains up but its behavior over the last decade has been curiously flat. During the 1990’s, the Dow went from 2750 to almost 11,500. The collapse of the dot.com bubble set it back, but it still ended the century at 10,700, about where it is now.
Its stagnant record since 2000 contrasts with its performance for the preceding century, which saw stock prices gaining 5% annually, even before adding dividends. Popular stocks have been mixed since 2000. So far this century, Microsoft and Wal-Mart are flat, Ford down 50% and General Motors lost 100%. Chevron is up 50%, IBM and Costco doubled, McDonald’s tripled and Apple is up 5000%.
The new century saw investors worried whether their computers would crash with the new Millennium. Less than a year later, such concerns were forever overridden by the tragic events of September 11 that continue to shadow our thoughts. Their costs were borne most heavily by those who died in the attacks and by the six thousand American dead in our armed services.
In economic terms, a study by Brown University estimates the dollar costs of the wars in Iraq and Afghanistan at $4 trillion. This staggering sum, equal to the total of all federal deficits since 2006, includes interest costs, as the war expenses were mostly borrowed. It also adds estimated future payments and services to veterans.
Sadly, many veterans will return to receive only thanks for their service and maybe a parade, when they might prefer an offer of a good job. I continue to hope that our leaders and prospective leaders will acknowledge that our fiscal situation is largely due to the anomaly of a housing market collapse following the bills for two wars that are winding down.
Our current economic problem is job growth, not deficit reduction, which can come later. At the least, I would hope to see stimulus measures targeted for veterans. New job training and other education, perhaps a revived GI Bill, would help. Service people spend a lot of time in education, either in training or instructing, and our educational system could benefit from the skills and discipline of these men and women.
Another cost of 9/11 is the lingering fears that have depressed so many. These probably contribute to the flat performance of the overall stock market since then. Persisting anxieties may also increase to the heightened market volatility. Fluctuations of 4 percent or more during a trading day are now six times more common than in the 1990’s.
Investors should use the down bounces to add to quality blue chip dividend payers. Proven winners include Chevron (CVX-$96), IBM (IBM-$163), Costco (COST-$80), and McDonald’s (MCD-$86). No dividend, but Apple (AAPL-$385) remains a buy at a remarkably reasonable 14 times 2011 earnings, a more moderate ration than it sported back in 2000.
Volatility will probably continue as long as the media exaggerate the impact of every event that comes their way. Investors can profit from this with stock in CBOE Holdings (CBOE-$26), the operator of the Chicago Board Options Exchange. Besides options on stocks, it trades options and indices on volatility, itself, as well as popular exchange-traded funds. Earnings this year will be around $1.50, up 50%, and there is even a 2% dividend yield.
These have been trying times. This country still leads the world with its economy and its resilient people. Giving in to fear concedes a victory to terrorists. A confident response to challenges as we saw with the U.S. measured support within NATO in support of the Libyan people made sense. That strategy was successful as will be thoughtful investing, particularly as investors get their confidence back. That will come with time and a recovering economy.