The Dow is flat-lining at around 10,000, the S&P 500 is stalled at around 1,000. These readings were seen a decade ago. Indeed, taking inflation into account, the US stock markets is trading at 1996 levels. Are equities dying of natural causes, or will the coma pass?
So much for the old adage, "Stocks in the long run," one might say. And so much for all those who, during the Tech bubble at the beginning of this century, were forecasting that the Dow could reach 35,000, 40,000 or even 100,000 over the next decade. One of the loudest cheerleaders for the Dow to reach 40,000 was author Harry Dent, who recently published a book with the title, "The coming depression." If his new forecast is as accurate as his old one, then there is hope for the global economy.
But reborn bear Harry Dent is not alone. Ever more analysts and experts are sounding the death knell for equities as an investment. They cite several reasons for the demise of the asset class in their obituaries.
First and foremost, obviously, the performance of equities in developed economies over the past decade has frankly been dismal. While we all know that past performance is no guarantee for what comes next, history remains our key to understanding the future. Trend tracking and extrapolating are still among the most widely used analytical techniques for investing and forecasting. And by these measures the outlook for equities is unpromising.
It is also argued that equities are in fact no longer an autonomous asset class. Over the past eight years or so, they have moved in sync with the carry trade – the currency strategy that borrows in low-interest markets and invests in high-yielding ones. And equities' performance has correlated very closely with other risky investments in recent years, making them far less compelling as a diversifier in portfolios.
Then comes the charge that institutional investors are the real market makers in equities. According to Federal Reserve statistics, US households hold less than 40% of the US stock market, while institutional investors hold over 50%. Back in the 1950s, over 90% of the US stock market was in the hands of private individuals.
Finally, the high volatility of the stock market since 2007 has made equities less attractive for private investors who seek stable returns.
Interestingly, the death of equities is not at all a new thesis. In August 1979, the US magazine Business Week ran it as a cover story. The arguments in that article are not far from the ones we hear today. "Equities are more than ever the province of giant institutional investors," was one charge. Another pointed out that, "for more than 10 years the largest returns have come from taking the fewest risks." And finally, the article noted that, "Indeed, by constantly rolling over short-term paper, investors have beaten returns on stocks and bonds by a considerable margin." Sound familiar?
However, there is one big difference today: inflation. It was clearly the main concern in 1979, with US consumer prices rising a whopping 13% that year. This time around investors are still reeling from the financial crisis, but inflation is a non-issue, at least so far.
There is a silver lining to the latest "death of equities" dirge, we note. Thirty years ago, it preceded what would become the longest and strongest stock market rally in history.
"History doesn't repeat itself," starts a remark attributed to Mark Twain, "but it does rhyme." We can only hope this trenchant observation applies today.
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