The easy money is gone, folks.
Bargains are still out there. But not easy bargains. Easy bargains were things like Alcoa
But those days are gone. Ten months and a 65% rally later, no-brainer buys are few and far between. One year ago you could point, shoot, and nail success. Today you've got to use a little more brain power.
Now that stocks have returned to sane levels, investors should ask what future economic growth will look like. Forecasting this stuff with precision is a fool's game, but we can at least make broad observations.
Right now, economic growth is being propped up almost entirely by stimulus measures and temporary factors like inventory restocking. If you look at meager third-quarter GDP -- ironically heralded as proof the Great Recession has died -- you'll see that sustainable drivers of economic growth are virtually nonexistent. To get real, sustainable growth, you need to see vigor return to consumers, since that's where 70% of our economic engine resides. Not only is this not happening, but the odds of it happening anytime soon are scant.
The reason is debt. Going back to the early 1970s, the average household debt-to-disposable income level is about 88%. In 2008, it peaked at about 130%. Today it's about 122% -- better, but still miles from the long-term average. Consumers still have their work cut out for them when it comes to purging excesses of the past decade. As long as they do, spending will plod along miserably, and so will economic growth.
Is all hope lost? If you refuse to acknowledge the new economic world we live in, yes. You're doomed, dear investor. It's a different world today. Bill Gross of bond giant PIMCO calls it the "new normal."
New normal means a world of slower growth, less spending, and debt reduction rather than accumulation. Take the past two decades, throw them upside down, and that's new normal. This is necessary and vital to getting back on track. But it nonetheless leads to a painful conclusion for investors: Lower economic growth means lower real returns on assets like stocks.
There is a solution, though. I'll yield the stage to Gross, since "new normal" really is his idea to begin with:
Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term P/E average on a cyclically adjusted basis ... ?
Let me tell you what I'm doing. I don't have the long-term investment objectives of [Berkshire Hathaway], so I'm sort of closer to an average investor in that regard. If that's the case, I figure, why not just buy utilities if that's what the future American capitalistic model is likely to resemble. Pricewise, they're only halfway between their 2007 peaks and 2008 lows -- 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6% not .01%!
Ah, utilities. Most pay just about every dime of free cash flow out as dividends because there's nothing else management can do with it. It's as mind-numbingly boring as it gets.
But plenty, like Consolidated Edison
I know what you're thinking: 6% return? That's it? This is how I'm going to make money? Well, remember the opening words of this article: The easy money is gone. If the economy slogs along, squeezing out lethargic growth, you won't be disappointed with those returns. This ain't the '90s, folks.
The past several decades were based on investors honing in on capital gains as a way to get rich. If there's a theme I'd expect for the coming decade, it'd be a reversion to focusing on the tangible returns of dividends. When economic growth can't be counted on, dividends can, especially in noncyclical industries like utilities.
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Fool contributor Morgan Housel owns shares of Verizon and Southern Company. Microsoft is a Motley Fool Inside Value selection. Motley Fool Options recommended diagonal calls on Microsoft. Southern Company is a Motley Fool Income Investor recommendation. Berkshire Hathaway is an Inside Value and Stock Advisor recommendation and the Fool owns shares of it. The Fool has a disclosure policy.