Investors who believe US stocks will always return more than cash or bonds if held long enough may be kidding themselves, hedge-fund manager Clifford Asness says.
Buy at the top, and a decade of patience probably won't pay off, said Asness, who manages about US$1.1 billion as president of AQR Capital Management. Even with the Standard & Poor's 500 Index 27 percent below its March 2000 high, stocks remain expensive enough that their returns over the next 10 years are likely to disappoint investors, he said.
This makes Asness skeptical that shares will hold the gains they've had since late September. The S&P 500, up 16 percent from a Sept. 21 low, rose 3.1 percent last week, with the biggest gains coming in stocks such as software maker Siebel Systems Inc and Internet site Yahoo Inc.
"Every rally we see is a flood back into the same stocks, which are still overpriced in my view," Asness said. "These are bear-market rallies," he said, lumping the advance of the past two months with gains in January and April of this year.
The Dow Jones Industrial Average rose 3.1 percent last week and has now recouped its decline after the Sept. 11 terrorist attacks in the US. The NASDAQ Composite Index rose 4.7 percent last week, leaving it 7.9 percent higher than before the attacks.
Investors are betting the Federal Reserve's interest-rate reductions and government spending increases will help the economy rebound next year. The Fed met Tuesday and cut its benchmark overnight lending rate for the 10th time this year.
Asness said he expects a 6 percent to 7 percent annual return for stocks over the next decade. That view is based on his analysis of stock prices compared with earnings, which shows S&P 500 companies to be more expensive than they have been at least 90 percent of the time over the past 50 years.
"The reason we've got to this point is years and years of 18 percent returns," Asness said.
The S&P 500 returned 18 percent a year in the 1990s. It fell 10 percent last year and has dropped another 15 percent this year.
Treasuries look good
While buying stocks now makes more sense than it did a year and a half ago, when benchmark indexes reached all-time highs, stocks are unlikely to return more than one or two percentage points over inflation-protected Treasury bonds, he said.
"It could be that people think they are going to get 1 or 2 percentage points better than bonds and are satisfied with that," Asness said. A more likely scenario is that "people think they're going to get 10 or 12 percent annual returns," he said. "They will be disappointed."
Indeed, a survey released Friday by the Securities Industry Association found that the median rate of return investors expect for next year is 11 percent.
Asness's biggest hedge fund has returned 28 percent to investors this year after fees, through bets on stocks, currencies and bonds in US and overseas markets. Some of the biggest gains have come from the steepening of the Treasury yield curve in the US and the outperformance of value-style stocks, he said.
For now, investors seem willing to buy the technology stocks that helped lead the gains in the 1990s.
Siebel Systems rose 35 percent after Chief Executive Tom Siebel told investors at a Goldman, Sachs & Co meeting that sales are recovering from their slump after Sept. 11. Siebel, whose software helps corporations manage customer service and sales accounts, was the best performer in the S&P 500 last week.
Goldman analyst Rick Sherlund, who helped organize the software conference, said in a note to clients that several companies led him to believe that the third quarter was likely the bottom for their sales.
Veritas Software Corp, which makes software for data storage systems, rose 14 percent; Mercury Interactive Corp, which makes software for Web sites, climbed 21 percent.
Several Internet stocks rallied last week, including Yahoo, the biggest Internet index site, which rose 25 percent. Sapient Corp, an Internet consulting firm, advanced 28 percent, the third-biggest percentage gain in the S&P 500. Even after last week, both Yahoo and Sapient are down more than half for the year.
A cost-cutting drive among computer-related industries is expected to show up in the annual fall Comdex trade show, which is to begin today with lower attendance and increased security.
Key3MediaGroup Inc's conference is expected to attract 125,000 to 150,000 workers, analysts and executives, down from 200,000 last year, said Vice President Rick Moore. Fewer than 2,000 companies will exhibit at the show, down from 2,300 last year, Moore said.
Microsoft and Nintendo Co may benefit from demand for home entertainment this holiday season, offering a bright spot in an otherwise gloomy holiday season for consumer-electronics retailers as consumers scale back purchases.
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