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It’s not your father’s market
Shift of wealth and supply and demand will drive markets higher, while inflation will remain low.
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Investors have entered this new millennium led by a bull market that surpasses any bull market ever seen. A great shift of wealth occurred in America during the 1980s and 1990s, and this shift of wealth has increased the profitability of our companies and their shareholders. It is my opinion that this shift of wealth from Middle America to companies and shareholders will continue to lead our stock markets to 20,000 on the Dow by the end of year 2005.
The law of supply and demand also will drive our markets higher. Many companies are buying back large blocks of their own common stock. This means that there will be significantly fewer shares available for purchase on our publicly traded stock markets. These companies understand that the price of their stock will probably go much higher over time. Pension plans are purchasing huge numbers of shares in our quality companies. Pension plans tend to buy and hold, which also reduces the supply of shares to our general market.
Inflation in the United States is at historic low levels, and it is my opinion that inflation will continue under control because of the shift of wealth from Middle America. Remember that a lower standard of living through lower wages will hold inflation in check. Inflation is constituted about two-thirds by wages. Technological advances continue to make it possible to produce everything from cotton to satellite launches on a more cost-effective basis with far less labor. Layoffs in higher paying, white-collar jobs continue. The ability of manufacturers to export jobs to developing countries where labor costs are one-tenth of the average U.S. worker should continue to dampen wage increases. Continued low levels of inflation due to continued lower wages is another reason to be positive about our equity markets in the new millennium.
Why now?
Baby boomers
Baby boomers are investors, not savers. There is an ever-increasing demand for shares in quality U.S. companies due to the increasing number of baby boomers who are reaching age 50. At age 50, these people become concerned more with saving for retirement than spending. The accompanying chart shows the number of 49 year olds in the United States from 1920 through 2010. Overlaid on this population demographic is the S&P500 as published in Harry Dent’s book The Great Boom Ahead. The effect of the increase in this age group should increase the saving and investing rate dramatically. As a result, more money will flow into our financial markets during the next decade. This should result in higher equity prices.
Not only will the baby boomers invest their own personal dollars, but also baby boomers will inherit more than $10 trillion from their aging parents over the next decade. The parents are savers. They invest in low return fixed income securities such as certificates of deposit, homes and fixed annuities, life insurance cash values or bonds. This is not your father’s market! As the boomers inherit these savings, some dollars will go to estate tax bills and toys. However, a very large percent of this $10 trillion will be repositioned into growth stocks. Growth stocks are the comfort zone for baby boomers. This additional $10 trillion will create upward pressure on stock prices of the quality companies.
There is no real alternative to our stock markets as an investment vehicle today. Fixed income products do not allow for an early retirement. Fixed income products have not kept up with inflation for the last 20 years. They are not flexible, and they do not earn the investor a better standard of living. Our current generation expects flexibility, as well as good return on dollars invested. They are not afraid of some volatility to reach a higher return long term.
Growth stocks best choice
Many economists feel that as investors retire, they will take their money out of the stock market to place it in fixed income investments. They perceive this strategy as being safer. As of Nov. 30, I totally disagree. Successful investors will be comfortable keeping the majority of their funds invested where they are well rewarded by the greatest returns consistent with the least amount of risk. Growth stocks have clearly been the best performers under this scenario for the past 6 years. This is what boomers are comfortable with, and I believe they will continue to stay invested in growth stocks even into retirement.
Consider the alternative. Dr. Jones retires with $1 million in a growth stock portfolio. His portfolio has averaged 16% annually for the past 10 years while invested in an unmanaged index fund. Well-managed accounts have fared better. Dr. Jones now reallocates his portfolio to fixed income products such as bonds, fixed annuities and certificates of deposit. At best, his returns will reach 6.5% annually, or $65,000 per year. Interest and dividends from fixed income securities are all taxed at ordinary income tax rates regardless of whether this is a retirement account or a personal account.
With the same $1 million left in growth stocks, Dr. Jones could comfortably withdraw $100,000 per year at a distribution rate of 10%. Only those funds distributed from retirement accounts would be taxed at ordinary income tax rates. Any distributions from personal accounts would be either tax free or taxed at capital gains rates (a big advantage to his bottom line). His growth stock portfolio should continue to average at least 16% annually, so Dr. Jones would have an ever-increasing growth stock portfolio, allowing him to raise distribution rates over his retirement years without touching principal.
As I have written many times over the years, wealth is best created and preserved through the long-term ownership of good, growing companies. The baby boomers understand this concept; they are comfortable with this concept and, for that reason, I believe they will continue to hold growth stocks as long as our markets reward them for doing so.
For Your Information:
- Fred L. Dowd is a registered investment adviser and portfolio strategist with physician clients throughout the United States with offices at 104 S. Wolcott St., Ste. 740, Casper, WY 82601. He can be reached at (800) 252-3693; fax: (307) 234-3557; e-mail: fldowd@trib.com; Web site: www.fldowd.com.