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Stocks Are Dying, Again

On July 8, the U.K's The Telegraph noted that because the yield on long-term dated pan-European sovereign debt was less than that on equities, it could mark "the final death knell for Europe's 60-year love affair with equities, and therefore the start of a generalised retreat from risk that will see the economy stagnate or worse for perhaps decades to come."

This sounds awfully familiar to BusinessWeek's infamous 1979 article "The Death of Equities." The following is a summary of its main points.

  • When the article ran, about seven million investors had left the stock market since 1970.
  • Equities were now the playground primarily of large institutional investors.
These observations led Robert Salomon, general partner of Salomon Brothers, to conclude: "Institutions could now withdraw billions from both the stock and bond markets." BusinessWeek continued:
  • This death of equity can't be seen as something a stock market rally will check.
  • Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks.
Based on the above, BusinessWeek concluded: "For better or for worse, then, the U.S. economy probably has to regard the death of equities as a near-permanent condition."
So let's go to the videotape to see how accurate the forecast was. In 1979, the S&P 500 Index increased more than 18 percent. It followed that up with a 32 percent increase the next year. From 1979 through 2009, the index increased at an annualized rate of 11.5 percent. It certainly was a good thing that the elderly investors of 1979 "didn't understand the changes in the nation's financial markets."

The warning about the "death of equities" wasn't the only similarity between The Telegraph and the BusinessWeek articles. The Telegraph article continued: "The UK stock market used to be largely owned by its UK corporate and institutional constituents through their pension funds and savings products. As these funds mature and diversify into more risk averse investment strategies, that relationship is being progressively broken." This is amazingly similar to BusinessWeek's warning that "Pension fund money can now go not only into listed stocks and high-grade bonds but also into shares of small companies, real estate, commodity futures and even into gold and diamonds." And we know how that turned out.

Investors need to understand that the financial press is all about getting you hooked on the noise. The only value their forecasts have is as entertainment.

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