Way back in August of 1979, BusinessWeek ran one of its most famous cover stories ever on “The Death of Equities.” The story is widely regarded as a brilliant contrary indicator. Shortly after it ran, the market began a 20-year bull run.
So we’re taking comfort from what would otherwise be a terrifying analysis from Citi’s global equity strategist Robert Buckland on the death of the “cult of equities.” Neil Hume at FT Alphaville reprints the most knee-knocking bits of Buckland’s note describing how investors may finally have given up on equities.
As background, what Buckland is essentially arguing is that all this talk about stocks being “cheap” is a misreading of the market. Instead of declining equity valuations demonstrating a “buy” signal, they are showing the equities market has simply died, or at least gone out of fashion. Dividend yields are still too far below bond yields to be attractive.
The problem, as Buckland sees it, is that stocks have simply stopped delivering returns that justify their volatility. We may be at the end of a very long bubble in stocks. In order to return to something like their historical yields, stocks may have to drop another 40%. That’s about 500 points on the S&P.
Here’s Buckland (via Alphaville):
Equities have never been particularly good at hedging inflation anyway, and now index-linked bonds can do a much better job .
Equities’ ability to match wage growth has been mixed. Increasingly mature pension funds will want to switch bonds as the moment of retirement approaches.
Defined contribution investors (where the individual takes the risk) may be less willing to tolerate volatile equity returns than the old defined benefit plans (where the employer takes the risk).
But most importantly, it is dreadful returns that will be increasingly putting investors off equities. Since the end of 1999, global equities have returned -29% compared to a +80% return from global government bonds. Not only have equity returns been dire, but the volatility has been brutal. Having two 50% bear markets in one decade is enough to test the patience of the most determined equity cultist. Just as excellent equity returns helped to promote the cult of the equity in the 1950s, so terrible returns seem to be tearing it down now.
It’s not just the difference in the mechanism of investment–defined contributions and 401Ks instead of defined benefit plans. Buckland could throw in an ageing population seeking more security, a crowded economy with less room for growth, increasing foreign competition for capital, a productivity boom that may have reached its apex and a slow down in technological innovation. Oh, and don’t forget that investors may be turning decisively against the traditional corporate form of publicly held stocks capitalising companies altogether, favouring new fangled limited partnerships instead.
Dividend yields are higher than treasury bond yields, of course. But they are far lower than corporate bond yeilds. So Buckland things that corporate bonds are the natural successor to equities.
There, we said it. Is the death of the cult of equities enough to signal the start of the bull market? (Note: it didn’t work last time we tried this trick, so don’t get too excited.)