Thursday, July 11, 2013

Abandon All Hope, Ye Who Enter Here

The Financial Times is out with a long article this morning that makes for depressing reading for investors.

Written by John Authers, the piece surveys the investment landscape, and essentially argues that basically every asset class offers little appeal.

Here's an excerpt:

Both equities and bonds look expensive compared to their own history (dramatically so in the case of bonds).  Put the two together and the plight of pension funds with fixed liabilities to meet appears impossible. Cliff Asness, a former academic who now runs AQR Capital Management in New York, says the prospective return over the next decade from a portfolio invested 60 per cent in US equities and 40 per cent in bonds is 2.4 per cent per year.  This is the worst predicted return in 112 years.

But wait, it gets better:

The London Business School professors are emphatic that the old way is not an option. "To assume that savers can confidently expect large wealth increases from investing over the long term in the stock market - in essence, that the investment conditions of the 1990s will return - is delusional." they say.

Essentially, then, investors are getting the same message that sinners in Dante's Inferno received centuries ago: Abandon all hope.

As you might suspect, I really don't agree with most of the article.  It ignores, for example, the continued growth in global corporate profits; the diminishing supply of equities (40% less than 15 years ago);  and the vast sums of investable assets that need to find a home.

I could go on, but the most bullish part of the article is its bearishness.

Bull markets rarely start with a wave of optimism.  In 2009, for example, the media was full of stories predicting the end of stock market investing, and the market promptly doubled in the next four years.

Further back, in 1981, Business Week confidently carried a cover story predicting the "Death of Equities".  Stocks had gone nowhere in the 12 years prior to the article, Business Week sternly noted, and with inflation running so high, and interest rates in the mid-teens, investing in stocks was sure to be a losing proposition.

This prediction, of course, was followed by a 19% compound annual return for stocks over the next 17 years.