By Matt Malick and Ben Atwater
There has been an increase in web chatter, television series, movies, books
and news reports about various cosmic disaster scenarios
including asteroids, solar flares and black holes. David Morrison, the
senior scientist at NASA’s Ames Research Center in California and a
Harvard PhD in astronomy, recently asked, “Why is our society so focused
on potential disasters?”
Dr. Morrison’s question is applicable to not just astronomy, but also
the pervasive negativity around virtually everything from politics to
And it is no wonder. Using the U.S. stock market as a barometer of mood,
it is at the same depressingly stagnant level as it was a year ago
(spring 2011) . . . and fourteen years ago (summer 1998).
Not just that, but during the decade of the 2000s, investors experienced
not one, but two drops of about 50% in the U.S. stock market. And after
making major progress in 2009, the market has struggled with 20%
declines beginning in the springs of 2010 and 2011.
Although it rebounded convincingly each time, we are now mired in yet
After all this, you might assume that nobody would invest in stocks.
This is partially correct. Beginning in 2007 and accelerating to this
minute, investors have moved over $1.4 trillion from stock funds to bond
Outside of mutual funds, institutional investors are also fleeing
equities. Take the massive German insurer Allianz as a prime example.
Today its portfolio is 6% stocks, whereas ten years ago it was 20%
equities. Given the legal constraints that insurance companies
must follow within their portfolios, 20% was a highly aggressive stock
position, likely pushing regulatory limits. So at the worst possible
time, Allianz had its maximum equity exposure. Now, a decade later, its
stock exposure is muted.
This is also true of pension funds, many of which are substantially
underfunded. A decade ago, U.S. public pension pools allocated about 70%
of their assets to equities, now they have scaled that back to 54%. Not
knowing the future, but with an eye toward the
past, this is seemingly backward.
To paraphrase Warren Buffett, people tend to invest through the rearview
mirror, which he reckons is about as advisable as driving in the same
Chris Puplava, who operates the blog Financial Sense and is a Portfolio
Manager with PFS Group in San Diego, CA, elaborates on Buffett’s
“What investors must remember is that secular bull market tops are
formed at a time when everything couldn’t be better or life brighter.
This was the backdrop of the 1929 secular bull market top in which the
U.S. industrial giant was firing on all cylinders;
or the 1969 secular bull market top in which nothing seemed impossible
as the U.S. put the first man on the moon; or the 2000 secular bull
market top when we entered a supposed new era of technology and
permanent growth. Conversely, when things look like they
couldn’t get any worse and that the whole world is going to end, new
secular bull markets begin to form.
Right now seems to - once again - fit the description of ultimate pessimism. According to
Barron’s, “the 10-year trailing annualized return (excluding
dividends) has risen from below zero to a bit over 2%,” a depressing
statistic in and of itself. But, what does that potentially tell us
about the future?
Barron’s further reports that, “if the S&P 500 is at today’s
level on October 9, the tenth anniversary of the 2002 bear-market low,
the ten-year trailing return would be 5.5%. That’s similar to post-bear
periods in the late ‘40s and late ‘70s – decent times
to lay patient bets on equities, but not the start of bull-market
manias.” The point
Barron’s makes is well illustrated in the below chart from Blackhorse Analytics.
to the mean would indicate that returns will trend substantially higher
over the next decade. But we are hardly suggesting smooth sailing.
Instead, we believe that the market will eventually reward patience. You
cannot predict the exact day when
stocks will begin their next prolonged boom – it is impossible. But you
can though invest while the seas are still rough, knowing that if
history is any guide, clear skies will return.
So, where are we?
We do not pretend to know what will happen next week, next month or even
next year. However, from a long-term perspective, we are likely closer
to the end of the market’s doldrums than we are to its beginning.