For a variety of excellent reasons many investors are concerned that the stock market may still significantly fall further, even though the Dow (Dow Jones Industrial Average, or D.J.I.A.) is already down about 40+%, since its high in early 2000, while the Nasdaq is down about 70%.
Bill Gross, managing director of Pimco Funds, suggests that on a number of traditional valuation measures stock indexes remain overvalued and could fall about another fifty percent before reaching fair levels, given companies' true profitability.
Corporate earnings have been inflated by not expensing the ballooning stock options. Some argue net profitability, after considering the costs of management and employee stock options, might average only half to two-thirds of reported earnings.
Similarly, if companies were to show realistic rather than wishful levels of pension fund returns, their overall profitability would, on average, be much lower.
At today's prices, Gross suggests stocks might return only two to three percent over inflation, virtually the same amount now available on long-term, essentially risk-free Treasury Inflation Protected Securities (TIPS) or on low cost mutual funds specializing in this type bond asset.
He also points out that stocks have historically been priced to yield over 4% a year, but that such dividends now average only about 2%.
For all these reasons, he suggests TIPS held to maturity may be a better bet for investors now than stocks. If one can get the same return with bonds, and risk-free, why invest in equities, which certainly are not without the potential for both short-term and long-term loss?
Yet, Jeremy Siegel, author of Stocks for the Long Run, notes that up till now, in any twenty year period, if one reinvested dividends and capital gains, stocks, on average, have always beaten the total return of bonds. He still believes, even with today's equity deficiencies, investors will come out ahead over time.