by Jeff Reeves | July 11, 2012 6:00 am
You see the headlines everywhere: Low market volume, high market risks and a general fear that nobody knows what’s next for the global economy.
As a result, a number of folks have been revisiting the summer of ’79, taking a page out of the old BusinessWeek cover story entitled “The Death of Equities.” Back then, runaway inflation was the crisis du jour instead of today’s catastrophe caused by both mortgage and sovereign debts. But the sentiment is the same.
In short, only institutional investors and the very old are into stocks — and even they’re second-guessing their decisions lately.
The market is a wasteland as a result, full of low volume and misery for all participants.
This is the trend in articles on both permabear blogs and mainstream financial sites. Some are measured and factual about small investors dramatically reducing exposure to stocks. Others hysterically trumpet the “end of a six-decade passion for equities.” (Important note: 2012 – 60 = 1952 meaning the drought of the ’70s doesn’t matter to some at all anymore).
But the message is the same: Run screaming from stocks — all stocks — if you value your retirement funds.
Here’s the thing though: The August 1979 cover story in BusinessWeek about the death of the stock market, while a nice historical artifact of the decade’s troubles, was painfully incorrect. The Dow Jones Industrial Average tacked on 15% in the calendar year of 1980 and almost tripled across the next 10 years.
So, what’s the score this time? Will the doomsayers be right in 2012, or proven just as foolish?
I asked around and found three people who believe definitively that the “death of equities” redux is overdone — and that now is the time for you to be buying.
From Richard Band, Profitable Investing
It’s important to remember that the BusinessWeek article came out nearly three years before the secular bear market of 1965 to 1982 ended. The stock market experienced two major downswings of more than 20% after the BW article was published and before the great bull of the 1980s lifted off.
Why the delay? It took time for America (and the rest of the industrialized world) to achieve a lasting solution to the central economic problem of that era (runaway inflation).
This time around the central problem is the deleveraging of both the private and the public sector after a long period of unsustainable debt accumulation. The private sector has largely done its part — that’s why this secular bear market is in its final innings. But the public sector (specifically, the U.S. federal government and the national governments of most European countries, plus Japan) still hasn’t taken the painful steps necessary to balance future income and expenditures.
We’ll know that a new chapter has begun when the U.S. and other countries make a serious down-payment on fiscal reform. That could happen in 2013, but I doubt it will occur this year.
From Charles Sizemore, Sizemore Investment Letter
Investors like to look for that classic “Death of Equities” moment to aggressively get into the market. But widespread negativity among investors does not necessary mean that a new bull market is starting tomorrow.
Still, all else equal, it’s a good sign that the potential upside is much larger than the downside. It’s the classic trader’s argument that “there is no one left to sell.”
Looking at valuations, stocks are relatively cheap by historical standards and absolutely, rock-bottom dirt-cheap when compared to bonds, cash and most commodities. Buying when prices are cheap and sentiment is rotten is a good recipe for long-term gains. And if you buy stocks that pay decent dividends, you’re getting paid to wait out any short-term hiccups.
Just be realistic and acknowledge that prices can get cheaper in the short to medium term. That has certainly been the case for most of 2011 and 2012, as volatility coming out of Europe has caused sentiment to go from bad to worse.
Michael A. Gayed, CFA, of Pension Partners
At every single major market turning point there are tons of stories claiming the “death of equities.” Thing is, markets have a funny way of resurrecting from the dead. The tremendous amount of skepticism over stocks and capital appreciation in favor of bonds and dividends is about to reverse, and likely will do so once headlines read “Dow hits new all-time highs.”
There will come a moment of collective cognitive dissonance as price will no longer confirm the negative narrative. This in turn changes sentiment in the market from one of “I don’t want to play” to “if you can’t beat ’em, join ’em.”
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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