Since our year-ago investment essay A Case for Caution, several of the concerns expressed then are causing alarm today: rising interest rates, trade and federal deficits, debt levels, commodity costs, and equity prices relative to underlying value, but falling dividend yields (in relation to stock prices) as well as US dollar worth, compared to other major currencies.
The US market dividend now averages only about 1.7%, far below its historical level since 1928 of around 4%. The argument had been that companies can make better use of the dividend than to pay it to shareholders. The reverse turns out usually to have been true. Companies not currently in financial distress that nonetheless pay little or no dividend have often squandered the extra funds on huge pay packages for executives or on expensive empire-building purchases of other companies, though the combinations often add little to shareholders' profits.
The dollar has now fallen about 50% compared with the Euro in just the last three years. Such trends are unsustainable. Bond, stock, and real estate prices are all vulnerable.
The warnings of such eminent investors as John Templeton and Warren Buffett are at least as relevant now as in December, 2003.
The "Value Line Investment Survey" has tended to be optimistic by about 50-60% in its 3-5 year projections for stock appreciation. Recently it has suggested an average 3-5 year share price rise of only about 35%. Subtracting their historical excess expectations, a more reasonable forecast for the average stock might be a 10-20% loss over the next 3-5 years.