Almost Laughable

In “‘The Death of Equities’… Again?” FT Alphaville ponders whether sentiment has reached the kinds of extremes that have historically marked major — secular — turning points:

Thursday’s FT declares “the end of a six-decade passion for equities”. Quite a claim.

Institutional investors, from pension funds to mutual funds sold directly to the public, have slashed holdings in the past decade. Stocks have not been so far out of favour for half a century. Many declare the “cult of the equity” dead.

The story may evoke a feeling of déjà vu for some. Especially those who read the August 13, 1979 edition of BusinessWeek, which famously also announced ‘the death of equities’.

Admittedly, it took another couple of years for the bear market to end, but what followed was one of the biggest bull markets in history.

As a long-time market-watcher, I am acutely aware of the fact that “the crowd” tends to get overly pessimistic at market bottoms (in fact, for those who accuse me of being a permabear, I would have them note my well-publicized calls for a trading rally in March 2009).

Still, the notion that share prices are at a turning point akin to what we saw in the early-1980s is almost  laughable given that:

1. Interest rates back then were at record highs, while they are near all-time lows now;
2. Price-earnings ratios three decades ago were testing all-time lows and were half of what they are currently;
3. Dividend yields were nearly three times as high thirty-odd years ago as they are today;
4. Mutual fund cash levels in recent years are a fraction of what they were in the early-1980s;
5. Share prices had essentially tread water for a decade-and-a-half prior to the stock market’s early-1980s lift-off, while the current malaise has not lasted nearly as long;
6. Hardly anybody was calling for a major bull market just over three decades ago, while these days generational bottom-callers seem to be a dime a dozen.

As always, I could be wrong, but I really don’t think, to paraphrase a market cliche, this time is different.