Market disaster could be long-term blessing in disguise January 24, 2009 at 3:09 AM EST

The grim data pouring in from far-flung radar stations do nothing to persuade the rapidly growing crowd of doomsters that a recovery of either the real economy or the increasingly surreal markets is waiting to bust out as soon as governments get those stimulus dollars flowing.

Everywhere, economies are shrinking more precipitously than most of the professional tea-leaf readers anticipated. Britain is the latest country to officially join the membership rolls of the standing-room-only recession club. Canada is looking at a shocking 4.8-per-cent annualized contraction of GDP this quarter alone. Corporate profits are falling off a cliff. Microsoft and Toyota are laying off people for the first time in their history. Workers are seeking wage freezes and four-day weeks to keep their pay cheques coming. And the Chinese economic hare is looking more like a turtle with each passing day.

We could add to the mood of despair by highlighting the latest dismal forecast from New York University economist Nouriel Roubini, who sagely predicted much of what has come to pass in the credit markets and the economy. The headline on his latest published missive, The Worst Is Yet To Come, doesn’t do justice to the bleakness of his vision. No wonder a gold producer, Barrick Gold, has surpassed Royal Bank to become the TSX’s leader by market capitalization.

But in this winter of extreme discontent, it would be better for our collective psyches to consult one of the stalwart members of the shrinking club of optimists. And this side of Bank of Canada Governor Mark Carney, we can think of few better at finding the silver lining of any dark investment cloud than Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School and the pre-eminent student of long-term trends.

After all, it was Prof. Siegel who concluded that the Great Depression was actually a boon to long-term stock investors, because it gave them a rare opportunity to reinvest the proceeds of higher dividend yields at deep-discount stock prices.

The same is true today for dividend stocks, which Prof. Siegel calls "bear-market protectors" and "return accelerators" during miserable market periods. And 2008 would certainly make anyone’s list of the top-10 worst years.

Looking at returns dating back more than 200 years, he pegs normal U.S. stock market growth at 6.6 per cent annually after inflation. At the end of 2008, the market was 39.4 per cent below this trend line, the fifth biggest gap since 1865 and not far off the worst-ever 43.1 per cent of 1932.

Despite a wave of announced dividend cuts last year, more than four companies raised their payouts to shareholders for every one that reduced or eliminated them. And as Prof. Siegel points out, at more than 3 per cent, the dividend yield on U.S. stocks is now higher than the interest rate on long-term Treasury bonds for the first time in 50 years. Which makes carefully chosen dividend stocks one of the few islands of safety in the midst of a hurricane.

Speaking of which, the winds are about to abate, Prof. Siegel assures me.

His own research shows that after the seven worst performances in the past 145 years, the market rebounded 24 per cent on average the following year.

"I certainly am in the minority here, but I still claim that once people see the world isn’t ending, there might be surprises on the upside."

Now, Prof. Siegel acknowledges that, like many another market diviner, he was badly mistaken about 2008, which he thought would be a solid year for stocks. What’s worse, he predicted financials would lead the charge. Yikes.

He has given up on financials, whose concentrated holdings of toxic assets caught him off guard. But he isn’t ready to join Prof. Roubini and his band of naysayers.

"We’re in disagreement. I’ll give him the first round of this battle."