Ashby Foote offers an interesting analogy, yet an incomplete analysis in his comparison of “Stocks and Stockcars.” Foote uses the comparison of the strongest S&P sectors in the last five years to make the case that the U.S. economy has lost its leadership position in the world economy. That may or may not be the case, but unlike a NASCAR race, the economic race has no finish line. Thus, Foote has made a mistake common in extrapolation analysis whereby the view from today is used to make predictions about the future.
Although Energy, Mining and Raw Materials stocks have fared the best in the past five years, there is no compelling logic to suggest that will be the case for any period into the future. All one has to do is examine the mentality of the retail investor in the late '90s to see how that thinking can not only turn out wrong, but get you in trouble.
When the S&P 500 was measured “over the last XX years” in 1999 for example, it led investors to believe the norm was an average annual rate of return for stocks that was 13, 15 or 17% (depending on the starting point). But what is forgotten is that the “end” point turned out to be a pretty famous market peak. Any “average annual rate of return” figures will be skewed depending on where the particular index is at the “end” point.
p>Unlike a NASCAR event where participants have a very specific end to their race, the financial markets and world economy will go on as long as we do. Today’s “slingshot” often ends up as yesterday’s burst bubble. br> — William Stewart /p> p> POWER POINTS
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