How To Survive In A Volatile Stock Market

Until the market slowed, a bang-up start to 1998 had investors eager for more. Our experts map out what to expect now.

a caution here. I think it’s important for everyone to know that the market’s gains have been abnormally high. You generally expect to earn 9%-10% in the market a year. The United States is going through an extremely good period, but I, for one, do not expect those kinds of numbers to continue.

Our experts think the good times will probably roll until the elections. Eventually, however, the market will have to catch a breather; price-to-earnings multiples–the gauge of how cheap or expensive stocks are–are higher than they’ve been in two decades. Look for stock prices to cool for a while before they advance further.

ROACH: Currently the S&P is at very, very high levels, trading at an average price-to-earnings multiple of 27 or 28 times. A lot of us would like to see that come down to the low 20s or so. Still, there’s money pouring into stocks. Over the next six to 12 months, I really think you don’t have a lot of risk of the market correcting significantly. What we’re going to see, though, is a very, very volatile market, as we have for the last year. That’s short-term.

ELEY: I think that over the next three to five months, it’s likely the market will stay at about this level or maybe rise a bit.

EDWARDS: We see the market moving sideways as well, with occasional sell-offs of 10% or so, like there was in April. So far, whenever share prices go down, there seems to be enough people eager to get back into the market to help stocks bounce right back.

Are you used to double-digit earnings growth propelling the market to new highs? Well, our experts say things are slowing down.

ELEY: We’re already seeing corporate earnings growth projections decline dramatically from the beginning of the year. That’s less than half of the normal amount, or around 6%-7%. I think what we’re seeing is a normal development and, after a strong run of rapid earnings growth like that of the last three years, I fully expect that somewhere over the next 18 months or so we’re going to have a quarter in which there will be no earnings growth and perhaps a decline. That’s when I think the equity markets will wake up, and whether we’ll have a significant correction or something a bit more serious, I don’t know yet.

EDWARDS: If one looks at the second quarter, the S&P 500’s earnings were up 3.5% over last year, down from an 8.9% increase registered a year earlier. That’s also less than the 10%-plus returns that we saw in 21 of the previous 25 quarters.

The past few years, banks and diversified financial companies have done amazingly well. Look for that to continue, says William Roach. And with oil prices near a bottom, Randall Eley says big oil is about to have its day.

ROACH: The financial services group looks good. Low interest rates help, and an older

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