Morici: Harrowing times for stock investors

Peter Morici

These are harrowing times for small investors. October is historically a turbulent month for stocks but do not panic. Equities remain an essential tool for accomplishing long term goals like a secure retirement.

In recent years, big tech stocks have accounted for the lion’s share of stock gains. But virtually every hot tech company of recent years faces new challenges. Facebook and Twitter must bear added costs to ensure user privacy, police content for foreign interference and cope with additional government oversight.

Along with Google, those social media enterprises’ basic business model – mining user data to sell ads and information to market analytic firms – will require more self-discipline or encounter new regulation.

Amazon and Google face closer antitrust scrutiny from their treatment of business partners. Even if formal charges are not forthcoming, the public eye will compel more limits on their behavior.

Apple is casting about for new businesses, because it does not have any hot new gadgets and iPhones are approaching market saturation.

The stock market will have to get its growth from more traditional companies. However, with the economy expanding at three percent, instead of the two achieved during the Bush and Obama years, opportunities for mainline companies – everyone from consumer products to legacy tech companies – are improving.

Even with the lofty valuations of the glamour tech stocks, the average price-earnings ratio for the S&P 500, which accounts for about 80 percent of publicly trade U.S. equities, is a bit below its historical average of 25. With annual earnings growth for the third quarter coming in at about 19 percent, the market has reasonable potential for an upside gain of about the same amount.

Of course, uncertainty abounds about the future of the recovery.

The IMF has marked down forecasts for global growth from 3.9 to 3.7 percent, blaming trade disputes, rising interest rates and the like. The facts are most developing country businesses are hardly affected by U.S. tariffs and borrow too much when U.S. interest rates are low – they do not take into adequate account investment activity of similar businesses in other emerging economies and overcapacity results. And too much money is siphoned off by inept and corrupt government bureaucracies.

The Fed cannot keep U.S. interest rates near zero forever and has been gradually raising rates – and selling mortgage-backed securities acquired during the financial crisis–to fend off future inflation.

Most economists and Fed policymakers see the inflation neutral, short term interest rate a bit less than 3 percent, and that would imply only three more rate increases. If the Fed stops there, the global economy should be able to reasonably absorb it, and the U.S. recovery can go indefinitely.

Forever is a long time and inevitably, something bad happens – but when and what is virtually impossible to predict. When something does occur, a recession will result but the economy and markets will set right again – within a few years.

For most folks’ savings, stocks and bonds or CDs are the only reasonable places for retirement money. The IRS has made buying rental property for investment purposes tough unless you establish an independent business – that takes much more capital and personal energy than most folks can spare.

Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries 2 to 1, and no compelling argument has been offered that the coming decades will be any different.

Picking the next Apple or timing the market is virtually impossible for small investors. Virtually all should broadly diversify and invest for the long term by buying a fixed amount each month. Put most of the money you will not need over the next ten years for emergencies or big expenses into stocks – especially retirement savings.

Once you are within 10 years of quitting, gradually move about half of your money into fixed income vehicles with maturities of less than three to five years. Throughout, invest in a low cost S&P 500 index fund offered by USAA or Vanguard or a similar service. And perhaps an international index fund to smooth returns – sometimes U.S. equities do better while other times foreign stocks lead.

That is what Angela and I did, and now we only work as much as we like. Frankly, writing these columns is a treat for me.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times, LLC.