The Bennett Newsletter
Are equities dead? US equity funds are shrivelling as investors exit the market. Fund managers are running scared as their mantra about shares being necessary for capital growth fall on deaf ears, and their claims that shares always beat fixed interest investments are denied by a decade of negative growth. Their basic problem is an ignorance of cycles or a misplaced belief in a “new era” when shares would always appreciate and eradicate business cycles. A glance at other bear markets may be interesting.
Business Week August 13, 1979.
“The Death of equities” was the cover story of Business Week (BW) August 13, 1979. The article was published at a time when the Dow was languishing at 875 and had been trading in a see-saw fashion ever since topping out 6 1/2 years earlier in January 1973. Inflation was a persistent drag on the economy. Business Week found it hard for things to be worse and did not expect improvement anytime soon. The sub-caption for the cover of the magazine was "How inflation is destroying the stock market."
The article emphasized that the nation's financial markets had adversely affected by 13 years of inflation: “Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds--infinitely safer--rarely paid more than 4%. Today the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade”.
This indicates that the fund manager’s mantra that shares always outperform bonds is untrue for long periods. The BW article also asserts: “Further, this ‘death of equity’ can no longer be seen as something a stock market rally--however strong--will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms”.
The BW article continued: “The problem is not merely that there are 7 million fewer shareholders than there were in 1970. Younger investors [Baby Boomers?], in particular, are avoiding stocks. Between 1970 and 1975, the number of investors declined in every age group but one: individuals 65 and older. While the number of investors under 65 dropped by about 25%, the number of investors over 65 jumped by more than 30%. Only the elderly who have not understood the changes in the nation's financial markets are sticking with stocks.”
The article argues that in a "new era" of stock investing, the "old rules no longer apply." This is the reverse of what we have heard since the late 1980’s: stocks always appreciate. Unfortunately international stocks lost 3% 2000-2010.
Investor learned in the 1970’s that the rule that stocks were not a hedge against inflation. Stocks cannot live with high inflation. As Business Week in 1979 put it:”since 1968 stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%, gold by 19.4% and housing by 9.6%.
The article also stated that using stocks to invest for retirement was dead too: “Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared.”
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The Dow's final bottom occurred just three years after the article in 1982, after reaching a peak of 1024 in early 1981 (an appreciation of 17% in the two years after the "Death of Equities" article). In August of 1982, the Dow hit 776 before embarking on its greatest bull run that has extended to 11,722 in January 2000 after almost 15 years of a bear market (1967-1982).
As the Dow is now 10,750, equities have not increased value 2000-10. I could add that the NZ main index has yet to recover its 1987 highs, the Nasdaq is half of what it was in 2000 and the Nikkei a quarter of what it was in 1989.
Pessimism Now
CNBC has found widespread discontent in the market. Investors are dissatisfied with exchanges, regulators, robot traders, and more. The Business Post thinks equities dead too. The “Flash Crash” in May 2010 stunned many investors even though the collapse in prices was brief. The Madoff and Allen Stanford scandals point to weakness in the SEC. Brokers fees seem high when you can buy the whole market in an ETF. Growth is expected in emerging countries; why bother with the USA?
The NY Times August 22, 2010 wrote another death of equities. It reported investors deserting the market and pouring money into bonds. Some quotes:” Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.” And: “The notion that stocks tend to be safe and profitable investments over time,” it continued later, “seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security. “
The appetite for stock market risk among American investors has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group”.
A Motley Fool article says: ‘the feeling that all the good news is over is palpable. It's as if no one believes stocks selling at 12x earnings (and 8% cash yield) is that good a bargain because stocks may (shock!) fall next month or quarter or heck, even next year. So no one is willing to pony up the cash”.
My Views
I am usually bearish about equities as we are in a secular bear market that will last for years. The Dow has long cycles. Bull markets 1896-1929, 1949-1966, and 1982-2000 and bear markets 1929-1949, 1967-1982, and 2000- . I certainly advise against buying the index. But I think that stocks of well managed companies can still pay, either in dividends or in growth. I own stocks and advise others. In a good portfolio, judicious exposure to miners, oil producers, gold producers, good banks, food and clothing retailers etc is desirable if they have good P/Es and attractive dividends. For kiwis, some international stocks are a hedge against a falling dollar.
Large multi-nationals are often very profitable. A number listed in London and New York can profit from growth in emerging markets as well as increasing their profits in established markets where rivals are constrained by difficult credit.
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