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Market Perspective
When History Doesn't Repeat Itself
 by Ernie Ankrim, Ph.D.
Chief Investment Strategist
Frank Russell Company
February 6, 2003
This article has been provided by our parent company, and primarily deals with the US market.
The philosopher George Santayana warned that those who failed to remember the past were doomed to repeat it. He obviously wasn't a stock investor. Past performance is rarely a good predictor of future market moves — and that's an important message to keep in mind as we progress in 2003.
Many of my cohorts in the financial press have been digging through history to try to find some positive precedent for the coming year. For example, I've read a number of stories comparing our current environment to the markets of 1973-75. That was also a recessionary period marked by dramatic stock declines. In 1973, the market was down 14.7%; in 1974, it dipped 26.5%. But then in 1975, the market went up 37.2%. Observing how rarely we've had multiple bad years in a row, some pundits are now saying that 2003 could be a repeat of 1975. Other journalists are drawing similarities between today's political situation and the Gulf War of 1990; the swift end to that conflict led to market euphoria in 1991.
As much as I'd like to be as optimistic, I believe these comparisons are misleading, and that 2003 is really without precedent. I don't think we're poised for as great a bounce back as we had either in the mid-1970s or early 1990s. Today's market is simply not as undervalued, nor is our political risk as clearly defined.
Putting History in Context
Back in the 1970s, there had been a tremendous sell-off in the face of a serious US recession. Once the economy began to turn around, the market realized that stocks were incredibly cheap relative to historic standards — hence the dramatic upturn in '75.
Now let's take a look at our current market. We had a greater than normal return on stocks before 2000; I'd argue that we'd enjoyed the greatest run-up in stock valuations since the 1920s. So this market sold off not because the economy was in bad shape, but because people finally realized that there was nothing to support those stratospheric prices. And while we have suffered a recession lately, it's nothing like the dramatic economic contractions we experienced in the 1970s. I believe that what we're seeing now is the market adjusting to normal pricing.
Comparing today's geopolitical circumstances to Operation Desert Storm is equally inaccurate. That event initially caused a modest stock sell off, but when it became evident that the Gulf War would be a speedy success, the markets took off. Now I'm not a political analyst, and I don't have any ability to forecast international outcomes, but nothing I've read leads me to believe that anything that may happen in Iraq this year will be as quick or decisive. And even if the war in Iraq is fought and a clear resolution results, the bigger issue remains the war on terrorism which does not have a fast fix in sight. So while the market's perception of uncertainty — which has been depressing the economy — may improve, geo-political concerns are not likely to disappear quickly in 2003.
What's Ahead?
That said, I actually am upbeat about the outlook for the coming year. Most of the forward-looking indicators are positive, if not remarkably so. Assuming there are no great shocks, I think profits will begin to rise a bit and there will be an increase in investment spending by the second half of 2003. While I doubt we will see the double-digit gains or losses of the last several years, I forecast returns somewhere between 7% and 10% for the year.
This doesn't mean that the roller coaster markets are necessarily over. I think we can still have month-to-month experiences that are dramatic, if not as traumatic as last year. But I still believe that if investors get on the roller coaster soon, they'll get off a little higher come next December. And that's not a bad place to be.
Date of first use: February 6, 2003
The information and any statistical data contained herein have been obtained from sources which we believe to be reliable but we do not represent they are accurate or complete and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have.
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