Are We Headed for a Flat Market?

A week ago, I ran a poll asking readers where they thought the market was headed over the next year. The top response, with 45% of the votes, was that the market would flatten out for a while.

Over the past few years, we've seen the S&P 500 plunge nearly 60% and then bounce back up around 70%. If you've been investing in individual stocks, you may have been whipsawed even more violently as stocks like Teck Resources (NYSE: TCK  ) and Genworth Financial (NYSE: GNW  ) were beaten down to near-death prices only to swing back with massive gains.

After all of that craziness, a flattening-out of the market sounds like a nice opportunity for investors to catch their breath.

Flat market? Fat chance!
Unfortunately, a flat market doesn't seem to actually exist in reality. Looking at pretty much any snippet of the S&P 500's chart over the past six decades shows either a positive or negative slope -- never the lack of slope that a truly flat market would imply.

The market has, however, gone through periods where it has been range-bound. During these stretches, it has essentially bounced up and down within a range, constantly in motion, but going nowhere. And there's a good argument to be made that we're currently bobbing around in one of these range-bound periods.

Travelling without moving
Even for someone like me, who isn't at all into charts and market mechanics, it's hard to miss the fitful pattern that the market has followed over the past century or so. Essentially, we've seen periods where it advances quickly, benefitting from growth and valuations advancing from low to high. It's then entered extended spans of range-bound pinballing, allowing rising earnings to bring valuations back down to lower levels.

At the beginning of 1980, the 10-year average price-to-earnings ratio of the S&P 500 that Robert Shiller tracks was just below nine. We then watched that multiple rise to more than 44 by the end of 1999. And since then? We've seen two major crashes, a five-year bull run, and whatever you want to call the 70% rebound we're currently experiencing.

Yet with all of that, the S&P's price today is essentially the same as it was in mid-1998.

Considering that Shiller's valuation measure currently rests at 20.6 -- above the long-term average of 16.4 -- there seems to be a pretty solid case that we could see some more range-bound oscillations while the market works its way down to a lower valuation.

Range-bound and staying Foolish
If I could reliably predict the future, a range-bound market would be the perfect opportunity to get rich by buying market dips and selling at the peaks. But alas, I can't, so trying to time the market will likely end up a sucker's game.

If the market is, in fact, stuck bouncing around in a range, it really shouldn't change the approach of long-term, Foolish investors. The best strategy will be the same strategy that folks like Warren Buffett have followed through thick and thin -- that is, find quality companies and invest in them when the price is right.

For those looking to get busy though, here are two suggestions to potentially make the most of a range-bound market.

1. Keep a wish list. If the market does continue to bounce around, you'll want to be ready to take advantage of the dips. One way to do that is to keep a wish list, a compilation of quality companies that you'd love to own if the price was right. Here are a few of the companies currently on my wish list:

Company

Return on Equity

5-Year Average Annual Growth

Current Price-to-Earnings Ratio

Visa (NYSE: V  )

11.3%

NA

26.7

MasterCard (NYSE: MA  )

53.9%

44.6%

22.4

Mindray Medical (NYSE: MR  )

24.4%

31.8%

30.9

Source: Capital IQ, a Standard & Poor's company.

2. Stay alert to current opportunities. Just because we're 70% deep in the market's current upswing doesn't mean that there are no good buys right now, nor that you should be 100% in cash. As I've highlighted, market mavens such as Jeremy Grantham and Barton Biggs believe some of the best opportunities right now lie in large, well-known companies like Johnson & Johnson (NYSE: JNJ  ) and Cisco (Nasdaq: CSCO  ) .

Do you think we'll be stuck in a range-bound market? If so, what are you doing to make the most of it? Scroll down to the comments section and share your thoughts.

I think dividends are great in any market. Though the recent downturn has been challenging even for dividend payers, Todd Wenning shows how a high-yield portfolio can keep you steady.

Mindray Medical International is a Motley Fool Rule Breakers pick. Johnson & Johnson is a Motley Fool Income Investor choice. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Johnson & Johnson, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (12) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 18, 2010, at 12:46 PM, pondee619 wrote:

    "the S&P 500 that Robert Shiller tracks"

    Is there another S&P 500 that Robert Shiller does not track? Who is Robert Shiller?

  • Report this Comment On March 18, 2010, at 12:46 PM, pondee619 wrote:

  • Report this Comment On March 18, 2010, at 6:59 PM, TMFKopp wrote:

    @pondee619

    Seriously?

    The line reads:

    "the 10-year average price-to-earnings ratio of the S&P 500 that Robert Shiller tracks"

    Shiller is a Yale professor that has become well known due to his work on financial bubbles. He was particularly prescient when it came to both the Internet bust and the housing bust.

    http://www.econ.yale.edu/~shiller/

    Matt

  • Report this Comment On March 19, 2010, at 3:30 AM, joandrose wrote:

    What's the problem ?...

    The S & P went down 60% from it's high - and has since it's low point rebounded by 70% - no big deal . It is now at 68% of where it was ...... It still has to move up a further 47% to arrive back to the high where it was two years ago . Lots of room to move further up and start to make up for two years of lost growth before we begin to worry about flat-lining.

    Relax and enjoy the ride back up - we have still got a long way to go .

  • Report this Comment On March 19, 2010, at 7:51 AM, pondee619 wrote:

    yes, i read the line. is there an S&P 500 the Shiller does not track or is there only one? OR did you mean to say; The S&P 500, tracked by Robert Shiller, a Yale Professor...

    Shouldn't someone referred to in your story be introduced to your readers?

  • Report this Comment On March 19, 2010, at 10:18 AM, ETFsRule wrote:

    Pondee... he tracks the ratio. There may in fact be other ratios of the S&P 500 that he does not track. Work on your reading comprehension, and stop wasting everyone's time.

  • Report this Comment On March 19, 2010, at 10:54 AM, pondee619 wrote:

    Then I guess we should be told which 10 year PE ratio the author is referencing, the one that is tracked by Prof. Shiller.

    By using the word "that" you imply there are others and "that" one needs to be distinguished from this one or any of the others. It's that one, not this one nor another one. We really should be told which one "that" one is. "There may in fact be other ratios of the S&P 500 that he does not track." I assumed the author was referring to the most recent 10 year PE ratio of the S&P ending in 1980, which, it appears, is tracked by Prof. Shiller. This assumption may not be correct. There could be others.

    "At the beginning of 1980, the 10-year average price-to-earnings ratio of the S&P 500 that Robert Shiller tracks was just below nine". Was/is there another 10-year average price-to-earnings ratio of the S&P 500, at the beginning of 1980, that Robert Shiller does/did not track? If there was only one, why qualify it as the one that Robert Shiller tracks?

    The only person responsible for wasting your time is you.

  • Report this Comment On March 19, 2010, at 2:58 PM, TMFKopp wrote:

    Speaking of wasting time, I'm not exactly sure why I'm engaging here... but....

    "If there was only one, why qualify it as the one that Robert Shiller tracks?"

    Because Shiller's work on that ratio is well known, meticulously updated, and made available to the public. You can find it here:

    http://www.irrationalexuberance.com/

    Other than that, you're vastly over-thinking a very minute detail of the article. Do you perhaps have any thoughts on the thesis? Or just the grammar?

    (speaking of grammar, I'll admit it's not always my strong suit, but I have GREAT editors!)

    Matt

  • Report this Comment On March 20, 2010, at 2:18 AM, TMFKopp wrote:

    @joandrose

    "The S & P went down 60% from it's high - and has since it's low point rebounded by 70% - no big deal . It is now at 68% of where it was ...... It still has to move up a further 47% to arrive back to the high where it was two years ago ."

    That's called anchoring and it can be dangerous for investors (http://en.wikipedia.org/wiki/Anchoring). Just because the market was at X doesn't mean it will be back at X any time soon (look at the Nasdaq circa 2000 for a good example of that).

    Now if you believe the market still has plenty of room to run based on fundamental factors, that's one thing. But be careful about saying that the market can still go back up just because it was high pre-crisis.

    Matt

  • Report this Comment On March 20, 2010, at 12:04 PM, joandrose wrote:

    Hi Matt- you are quite right !

    What I am getting at is not that the market may be expected to fully recover in the immediate future to a previous high position - which was certainly oversold - only that we are still a long, long, way away from that point. Significant growth possibility still exists well before then. It's a time for judicious stock picking.

    Your observation about fundamentals is quite correct - I do however optimistically believe the fundamentals are in fact now falling into place and what is needed to underpin and create a real momentum in the economy is improvement in employment figures.

    Joe

  • Report this Comment On March 22, 2010, at 8:58 AM, pondee619 wrote:

    "that Robert Shiller tracks" "That", here, introduces a restrictive clause which, as there is only one S&P, is improper. A small point? Sure. But the devil is in the details. If you can not write what you mean, or mean what you write, your message is lost.

    The statement:

    "At the beginning of 1980, the 10-year average price-to-earnings ratio of the S&P 500 that Robert Shiller tracks was just below nine" states, quite clearly, that there were other 10-year average price-to-earnings ratios of the S&P 500 at the beginning of 1980 that Robert Shiller did not track. I even gave you a more correct way of stating what I think you meant (augmented here):

    At the beginning of 1980, the 10-year average price-to-earnings ratio of the S&P 500, tracked by Robert Shiller, a Yale Professor, was just below nine. The issue is not that Prof. Shiller tracks the S&P 500, the point is that since there is only one, the use of a restrictive clause is improper. There is only one. He tracks the S&P 500 not THAT S&P 500.

    "Do you perhaps have any thoughts on the thesis?"

    Yes. Over the next twenty or more years, stocks will be the best place to invest your money for the greatest possible return. One should increase his/her holdings in a diversified portfolio (this does include bonds and other investments for stability) gradually over the years to take the best advantage of this increase. Will the market be flat for an unspecified period of time? Sure, why not? That is just as likely as any other guess about short term market behavior.

    Short term market behavior is just noise. Over the course of a person's investing lifetime this noise will make scant difference. Asset allocation and diversification with steady accumulation are much more important.

    "Do you perhaps have any thoughts on the thesis?" Yes. It is just noise and a distraction.

  • Report this Comment On March 23, 2010, at 12:02 AM, mountain8 wrote:

    I've never read Mr. Shiller, but just from reading your comments is it possible that Mr. Shiller tracks only some of the 500 companies that make up the S&P? I will extend my ignorance by considering that the Dow 30 are not part of the S&P 500 companies. So maybe he tracks "Mr.Shiller S&P 500" consisting of 100 companies".The "Mr. Shiller S&P 500" being the TITLE of the bundle of 100 companies.

    Well anyhow from someone who doesn't know investing as much as I'd like, that's what the grammer in the article suggested to me.

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