Reports of Equities' Death Are Greatly Exaggerated

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

In Sunday's NY Times Paul Lim has a sort of 'What Should Investors Do Now?' article. As the title implies, the article questions many, if not all, of the assumptions investors have about how to have long-term success investing in the capital markets.

The viewpoint (as I read it) of the article is that it may take a long time for equities to recover, and even when they do, equities may not be so hot.

There is a huge flaw in the logic, in my opinion. We are in the middle of the event. As we stand now, the S&P 500 is down 30-something percent from its peak, uncertainties abound, and emotion is causing people to reevaluate every financial aspect of their lives. The middle of the event is not the time where people have the perspective to see such game-changing events. How can anyone know the paradigm has shifted until it has shifted (sounds like something Master Po might say)?

As there are more and more articles questioning the death of equities these days, there are a couple of facts that no one should lose sight of. It is actually possible we are in a bull market right now. The S&P 500 bottomed (for now?) in November around 750, and going into Monday the S&P 500 is at 930. That is 24% up in less than two months. I think the probability is greater that 24% in a month and a half is a bear market rally, but we can't know the answer until later.

Anyone thinking about giving up on equities should realize where they are emotionally right now in conjunction with where the market is right now. I'll save writing about why giving up on equities is a bad idea for another time and for now just focus on the emotion that is triggering that idea.

If you are pondering throwing in the towel, it would make more sense to remember how you feel now, then when things recover some more and you no longer are afraid ... that would be the time.

Back to the article which, as mentioned above, talks about it taking 16 years to recover from 1966 to 1982 and a similar circumstance in the 1930s. We are of course living through some version of that now. People still working who are smart enough to keep saving and investing are obviously buying at lower prices along the way and would recover much sooner.

Finally, note the ringing endorsement treasuries are given in the article:

AND as this bear has shown, no investment can beat Treasury bonds when it comes to protecting one’s portfolio in a downturn.

How's that for looking in the rearview mirror?

And the one sector that will do extremely well in such a market will be Treasury bonds.

How well can they do from here? This seems like the exact same thought process that is lamented at the beginning of the article about equities. Long-dated treasuries are up 30%, so buy them for their safety? Every one percent increase in 10-year yields works out to about an 8% drop in price; at 30 years it is about a 12% drop in price. The lower yield trend could, of course, continue for a while but buying now is buying after an historic rise in prices.

All of this ties in with extrapolation. The thing that caused people to call for $200 oil when it was at $147 causes them to think equities will never work again, and that US treasuries will always be safe (price-wise). This is what causes people to buy high and sell low.