As the world’s stock markets took a vicious tumble in late summer and early fall, one of the market’s most prescient observers issued a warning: don’t sell now. Burton Malkiel, economics professor at Princeton and author of “A Random Walk Down Wall Street,” wrote an editorial in the Wall Street Journal urging investors to ignore the market’s recent trends and to focus on the long-term. Malkiel acknowledged the long list of negatives that were driving prices down in the third quarter: economic growth had slowed, consumer spending was down, the U.S. credit rating had been cut, and Europe had not fixed its economic problems.
Despite the gloom, “it would be a serious mistake for investors to panic and sell out,” he wrote in early August. “There are several reasons for optimism that in the long run we will see higher, not lower, market valuations.” First off, stocks are cheap, he argued. Stock price to earnings ratios were very low by historical standards, while stock dividends were averaging 2.5 percent, comparable to current 10-year U.S. Treasury Note yields.
Meanwhile, even though economic growth in the United States had slowed, U.S.corporations are earning huge profits abroad. “For large U.S. multinational corporations, the continued growth in emerging markets will be the most important determinant of the future growth of corporate earnings,” he wrote. Consumers are gradually working off the excess of debt they accumulated in the last decade, and their payments to service debt have fallen sharply to levels last seen in the 1980s, he added.
He acknowledged that neither his nor anyone else’s forecast is perfect, but he said long experience in the markets has taught some basic lessons. “Investors who have sold out their stock at times when there have been very large declines in the market have invariably been wrong,” he wrote. “We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility.” His final advice: stay the course. “No one has ever become rich by being a long-term bear on the fortunes of the United States,” he wrote.
