|S&P 500 Index*||5.50%||5.50%||19.42%||Large-cap stocks|
|Nasdaq Comp.*||8.13%||8.13%||44.68%||Large-cap tech stocks|
|Russell 1000 Growth||5.62%||5.62%||24.11%||Large-cap growth stocks|
|Russell 1000 Value||6.12%||6.12%||20.84%||Large-cap value stocks|
|Russell 2000 Growth||8.64%||8.64%||43.21%||Small-cap growth stocks|
|Russell 2000 Value||8.15%||8.15%||35.72%||Small-cap value stocks|
|MSCI EAFE||6.24%||6.24%||26.25%||Europe, Australasia & Far East Index|
|Lehman Aggregate||-0.93%||-0.93%||2.81%||U.S. Government Bonds|
|Lehman High Yield||2.02%||2.02%||24.23%||High-yield corporate bonds|
|Carr CTA Index||1.88%||1.88%||12.14%||Managed futures|
|3-month Treasury Bill||.||.||0.95%|
|Through October 31, 2003. *Return numbers do not include dividends.|
As reported in earlier editions of this newsletter, a plethora of investment gurus, including such luminaries as Berkshire Hathaway’s Warren Buffett and First Quadrant’s Robert Arnott, have stated that equity returns going forward will be significantly lower than the spectacular run of the last two decades. The reasons cited vary, but typically include the present high valuation of the stock market; significantly slower earnings growth; and much lower dividend rates, which have historically been a large portion of the returns of equities.
Most rational investors will find the above argument nearly irrefutable. But if one looks even higher–at the index returns at the top of the page–it’s hard not to find some disconnect between theory and the real world.
Explaining this year’s big run in the stock market is no easy task. William Bernstein, author of The Four Pillars of Investing (McGraw-Hill, 2002), takes aim at this perplexing question in the Fall issue of his online journal The Efficient Frontier (www.efficientfrontier.com). According to Bernstein, the performance of an asset class is the sum of its fundamental return and its speculative return. The latter, which he calls “noise,” is a function of the standard deviation of the asset class and the effects of short-term trading. In his view, an asset class that is the target of momentum traders (i.e., those who buy the strongest-performing markets and sell the weakest) can deviate significantly from fair value, only to crash back to earth after the fervor subsides.