MarketWatch's Arends: Those Expecting Stocks to Rise 10 Percent Each Year 'Believe in Magic'

Monday, 25 Aug 2014 09:53 AM

By Dan Weil

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Stocks have averaged a nominal return of 10 percent since the 1920s. But many investors now confuse that to mean that the market returns 10 percent every year, says MarketWatch columnist Brett Arends.

"Do you believe in magic?" he writes. "It seems that for a lot of people on Wall Street the answer is emphatically yes," given the market's inexorable rise in recent weeks.

"Wall Street’s version of magic includes the belief that stocks earn that number [10 percent] regardless of valuations."

Editor's Note:
Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

The problem is that stocks' dividend yields now stand below 2 percent, compared to 4.5 percent in the 1920s, Arends says.

Meanwhile, real economic growth is running only at about 2 percent. The entrance of new companies into the market costs you 1 percent. That leaves you with a real return of about 3 percent, far below the historical average of 7 percent, Arends notes.

The S&P 500 ended at 1,988.40 Friday, close to Thursday's record of 1,994.76.

Some market participants warn that bulls may be overreacting to stocks' recent gains considering the thin trading conditions of late August.

"We're seeing a few people jump into the market because things look 'A' ok right now," Jeff Duncan, president of Duncan Financial Management, tells Reuters. "But it's a slow period . . . before Labor Day, so it isn't taking much to move the market up."

Elsewhere, individual investors apparently aren't worried that stocks continue to hit record highs, even though the S&P 500 index hasn't experienced a 10 percent correction since October 2011.

The American Association of Individual Investors (AAII) survey of its members for the week ended Wednesday showed that 46 percent are bullish on stocks for the next six months.

That's the highest level since Dec. 26 and up from 40 percent a week ago.

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

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