Domestic equities, already down around 40% for the 12 months ended January 30, are still struggling against a backdrop of weak earnings.
Not only did overall fourth quarter numbers reflect the sixth consecutive period of negative earnings growth, but also for the first time S&P 500 stocks collectively had negative earnings for a quarter--even if the battered financial sector were excluded. However, current longer-term forecasts estimate operating earnings in the $11 to $12 per share range by the end of 2010.
Based on current prices, that would produce a P/E ratio of 17.8, a multiple well below the 19.8 average since 1998. Just returning to "normal" would create significant opportunity for stock prices.
In the domestic fixed-income space, the mixed returns have been dominated by the spread between Treasuries (+8%) and non-investment-grade credits (-21%). Indices that had a Treasury component, such as the Aggregate Index or Government/Credit Index, were up 2% to 7%.
But with the first two years of the Treasury yield curve currently yielding less than 1%, investors with income goals will likely be forced to seek yield in other areas of the fixed-income market--investment-grade credits, for example. Even after rallying slightly in December and January, investment-grades are still trading at near record spreads over Treasuries.
And for those with more risk appetite, the high-yield markets are currently offering equity-like return potential with a substantially reduced downside. At the end of January, the Barclays High Yield Index was priced at less than 65 cents on the dollar, effectively pricing in more than triple the historic level of defaults with little or no recovery value.
International equity markets, meanwhile, dropped more than 45% in 2008, and emerging market stocks fell more than 50%, indicating just how globalized the world's economies have become. While there were several macro-driven collapses in the emerging markets, particularly in China (falling construction) and in Russia (political unrest, falling energy prices), pockets of relative strength existed elsewhere, including Chile (-29%), Columbia (-27%) and Israel (-30%). Not surprisingly, the outlook for the international markets is much the same as for our domestic equity market.
It's a given now that 2008 markets inflicted meaningful damage to investors' long-term investment plans. But while most of the losses reflect the current economic mess, a significant portion is a reflection of investors' fears. Governments everywhere have responded with various "stimulus packages" whose effect is still unknown and might be entirely limited.
But for investors who can ride out short-term uncertainty and focus on long-term asset allocation, the current market environment offers plenty of opportunities for success.
J. Gibson Watson III is president and CEO of Denver-based Prima Capital (www.primacapital.com) which conducts objective research and due diligence on SMAs, mutual funds, ETFs and alternatives.