My single biggest concern regarding equity markets is not a bear or a bull phase — its the wholesale abandonment of investing by the broader public. That is the reason it too 25 years to regain the 1929 peak — til 1954. It required an entire new generation to be born, grow up and start again. I figure we are about 40% of the way there now.
Clearly a stretch like the last ten or 12 years for the US economy and US markets is going to cause a lot of ripples in a lot of different places in terms of confidence, psyches, optimism, faith in the country's direction all of which could (and in this case, has) effect, or maybe that should be distort, prices of equities and bonds.
As far as domestic equity prices, whatever they do over the next period of time that is meaningful to you, they will do it with the weight of having some segment of the population that would otherwise be buying stocks not participating. Stocks could have fantastic decade or a lousy one but there is a segment of the population that will not come back to stocks.
Coincidentally another reader asked why I did not include the aging of the US population as a theme in yesterday's post. From my perspective it seems there are far more negative effects from this trend than positive ones with one of the negatives being the boomers pulling back from stocks as a matter of asset allocation.
So we have potentially fewer new investors and potentially more existing investors rotating out of stocks permanently. These are not new thoughts here so the argument for US equities muddling at best continues to be my base case. I'm not too concerned with trying to quantify this only because based on bigger trends US equities seem to have less going for them so it makes more sense to spend time on markets that have more positives than negatives. This has generally been one of the long term building blocks in client portfolios and by extension this blog.
There are obviously plenty of well reasoned, contrary opinions which leaves you needing to solve this for yourself. One contributing factor the the bearish tone I have had on US equities since the beginning of the site has been the weighing out of all the negatives and all the positives and drawing the simpler conclusion.Finally a note about the Red Sox and Terry Francona. The Red Sox are not going to re-sign Francona so it is sort of a firing as opposed to real firing but it is the same result; they don't want him so he is gone.
The historic collapse was a combination of poor play, bad luck and injuries. Given the number of injuries I'm not sure it makes sense to blame the manager but it appears the team has decided that enough blame is attributable to Francona to let him go.
It marks the end of an era of greatness for the team. Greatness could resume next season of course but I find it difficult to believe that the first year transition to a new manager will be easy (maybe they have someone in mind already though) and it also surprises me that they are giving up on Francona given the body of work in such a short time. As my brother says "in Theo (Epstein, the GM) we trust" and that is exactly what Red Sox fans must do...unless he goes to the Cubs.
9 comments:
I really don't think this is an issue. Now, we could have a big long selloff due to the baby boom, but I think the rise of the 401k, bigger and bigger pension funds, online trading accounts, a world stock market that is much much more liquid in the last 20 years, all adds up to keep people from "abandoning" the stock market.
Let's not forget that the "Great REcession" wasn't nearly a scary as the Great Depression.
It all depends on what time frame you look at. I do think the last years less people are in the market and that will continue for some time.
Somewhat balancing the baby boomers departure from the market is the emergence of new middle class people in the developing world who will, presumably, be entering the market.
In addition to anon's good point at 9:40; the Chinese government are rumored to be wanting get into Western equity markets. They'll be able to buy access to technology and influence in their markets.
9:40, that is Jeremy Siegel's argument--at least he is the first person I've heard make that case.
My own take is to disagree. If the fundamentals are relatively unattractive as I think they are and the dollar will trend weaker then why are newly middle class investors going to buy American companies?
Roger, generally the Chinese follow the Party line. This, I think, has been proven often in the country where they address each other by surnames and write their addresses starting with the region and ending with their house number. They are all really in it together, and (mostly) religiously will accept and believe in what their government, and the tv, tells them. So much so, in fact, that if you're Chinese and have faith in a different religion you will speak about it in hushed tones to only those whom you trust. Killings of overtly religious people are not uncommon there, and are always blamed on rival groups, even if those groups are of the same religion.
There's a cache in buying foreign products in China, although word of dysfunctional products there spreads quickly.
Thanks Roger for sharing your thoughts. Maybe its only a "gut-feel" but this rotation out of the public capital markets somehow feels different than just a temporary phase. I also believe it is not just a generational issue - meaning multiple generations do not like what they see for various reasons so don't count on Gen X or Gen Y or New Millennials to fill the gap anytime soon.
Unfortunately, it seems that Wall Street has become the worlds casino and the place for highly successful entrepreneurs to "cash-out." Not sure where this all leads, but I believe we are witnessing a fundamental shift and Ritholtz's concern may happen.
Percentage of people invested in the market can only go up.
I know this because I also know house prices can only go up :)
"negatives being the boomers pulling back from stocks as a matter of asset allocation" - I've been retired 10 years and find I have a higher stock allocation now. As my 4-5% CD's mature, my equity allocation has increased. I know its some added risk/volatility but good quality stock portfolio at 3% still lets me sleep.
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