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Odds Get Tougher For Stock Investors

June 14, 1990

NEW YORK (AP) _ After the stock market bonanza of the 1980s, many savers and investors seem bound and determined not to miss out on the promise of the 1990s.

In particular, they have been pouring money into stock mutual funds, both on their own and through retirement programs such as company-sponsored 401(k) savings plans.

Their inspiration comes from many sources: The apparent end of the Cold War and the perceived triumph of capitalism over communism in many parts of the world; opportunities in fields like health care, technology and the environment; and, not so coincidentally, the recent rise of the U.S. stock market itself to record highs.

Much of this optimism may prove justified, says a financial advisory firm long known as a staunch advocate of investing in stocks.

But it also cautions that anyone hoping for a replay of the ’80s in the next decade is bucking some long statistical odds.

″We are not doom and gloomers,″ says Norman Fosback at the Institute for Econometric Research, publisher of a series of newsletters on investing. But the percentage returns from stocks in the ’90s, he declares, ″will almost certainly fall far short of those earned in the 1980s.″

While there are no absolute limits on the gains stocks can achieve, Fosback observes, ″there are a few constants″ that can be used in assessing their possibilities and probabilities.

For starters, he notes, the 500 stocks that make up Standard & Poor’s composite index produced a total return - appreciation plus dividends - in the 1980s at an average compound annual rate of about 18 percent.

That ranks far above the historical trend rate, after all the booms and busts are figured together, of about 10 percent.

Stocks and the economy, furthermore, began the 1980s at a very low point - which Fosback says effectively magnified the opportunities for gains.

In financial matters, he says, ″when there is a lot of room for improvement, and little room for further discouragement, the path of least resistance is to the upside.″

When Wall Street’s bull market began in 1982, the stock of a typical company sold at a price about seven times its annual earnings. Today price- earnings ratios are more than double that, in the neighborhood of 15 to 1 or 16 to 1.

For another doubling of P-Es to occur in the ’90s, Fosback notes, they would have to soar to their highest levels in history.

Similarly, he argues, there is less room for growth in business activity and corporate earnings with an unemployment rate around 5 percent starting the 1990s than there was in the early 1980s, when unemployment stood near 11 percent.

″It is likely that unemployment is already close to its lowest possible level right now,″ he says.

″This means that real national growth will probably increase 3 percent or less per annum in the 1990s, not the 4 percent-plus rates of the last eight years.

″Irrespective of political, social and economic forces, investors will probably earn a much lower return in the 1990s than the 18 percent per-annum total return recorded in the 1980s,″ Fosback concludes.

″Does all this mean that the Dow can’t reach 3,000, 3,600 or 5,000? Of course not. At some point during the decade, the market will probably again sell at 20 times earnings.

″What our analysis does indicate is that long-term buy and hold investors will not find the stock market to be the sure thing that it was in the 1980s.″

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