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Most Stocks Still Aren't That Cheap

There's no reason to believe stocks can't fall even further.

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Stock investing can require a long time horizon--and I mean really long. During the 25-year period from October 1929 to the end of 1954, the Dow Jones Industrial Average rose 0% annually, on average. From 1966 to 1983--17 years--the Dow also rose 0% annually, on average. And in Japan, stock prices have been flat, on average, for the last 18 years and counting.

Could a Japan-style deflationary spiral happen in the U.S.? There's no compelling reason why not. Do I think it will happen? No. But the likelihood seems greater than zero. And it's getting larger.

Bubble Hangover
We're in a post-bubble world right now, and it may take a long time for stocks to return to the prices we saw just a year ago, let alone those of March 2000. There's a lot of excess capacity still out there, especially in techland. Overcapacity has a tendency to create a vicious cycle: Companies don't need to buy new equipment because they have too much already, so equipment suppliers lay off employees and cut prices. Unemployment rises and consumers stop spending. If consumers stop spending, demand falls further, creating even more overcapacity and more price cutting.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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