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Column | As market recovers, expect historically relevant returns

Investors currently can review a landscape which shows major equity indexes as approximately the same level as 10 years ago, interest rates on guaranteed fixed income vehicles at record lows and real estate prices in the worst slump since the Great Depression.

There are some early signs that the current economic recession is at least slowing in its pace of decline, and perhaps we are near the bottom of the longest recession since World War II. I believe what made this recession somewhat shocking was that we have not had a slowdown of anything near the scope of this one since 1990–91 and before that back to 1980-81.

In other words, we have been fortunate and have gone much longer than normal between economic system “cleansings,” which is exactly what recessions do for the system. The slowdown makes every business owner examine their resources and make decisions about how they can operate in the most efficient manner. Economic slowdowns are unpleasant for most, but are healthy and necessary in the long-run to maintain the health of the economy.

As investors, what should we expect going forward? Should we assume depressed rates of return because the recovery may potentially be a slow steady process instead of a rapid return to what we have been used to for the last fifteen years or more? Or should we bank on the historical precedent that shows the stock market providing returns well above average in the decade subsequent to one like we have just experienced — a dead period for the major averages?

My advice is to expect historically relevant returns that financial markets have generated through the economic cycle in the past. For equities, an expectation of about 10 percent average annual return (total return including price appreciation and dividend income) would not be overly optimistic over the next 5–10 years. There are no guarantees, but to expect an average result from the current depressed levels is not being too much of a Pollyanna, in my opinion.

For fixed income investors who buy bonds or bond funds, I think the universe needs to be carefully divided into two sections. The very safe investment which have the backing or guarantee of the U.S. Government are now very over-priced relative to historical levels and as a result are providing very low yields. This is the result of the true financial panic that existed among investors last fall and to some extent remains today. In my opinion, these securities are likely to provide below average returns over the next several years as the economy recovers and interest rates rise.

The real opportunity in the fixed income markets are the corporate issued securities which performed poorly last year, but which are now in a recovery mode and providing higher yields and potential for capital appreciation over the next several years.

Long-term average returns for government bonds are usually around 5 percent — currently just over 3 percent. Investment quality corporate bonds generally yield around 6-7 percent but are presently yielding 8-9 percent, hence the opportunity referenced above.

In my experience, short-term trends tend to sway us, but the tendency of the markets to end up back at the long-term averages is quite amazing — so that is how I would create my expectations as an investor today.

Tom Breiter, the president of Breiter Capital Management, Inc., a registered investment adviser, can be reached at (941) 778-1900.

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