The Coming Decade Of Stocks, Part 2

| About: SPDR S&P (SPY)

(continued from The Coming Decade Of Stocks)

It's one thing for me to say, "Get invested, we’re in a secular bull market that began in March, 2009 and is likely to last into the 2020s." It’s another thing for you to believe it.

But here’s the deal. You don’t have to believe it. You just have to acknowledge it’s a possibility. Once you realize it's possible, it changes everything. You’ve got to own stocks. After all, a rational investor hedges his bets, and if a bull market is a reasonable probability, it’s a mistake to have excess capital in cash and bonds.

Before I argue my secular bull hypothesis, a word as to the stakes. Indeed, they are sobering to contemplate. If you’re on the wrong side of this cycle, there is no Plan B. In the secular bull that began in 1982, by contrast, everything worked: stocks, bonds, real estate, even cash paid 7% and above for much of the 80’s. You could’ve sidestepped the entire 1982-2000 bull market and come out the other side just fine, thank you very much.

But the secular trend that began in March 2009 has a different story line, one out of The Haves And The Have-Nots. The haves are in stocks, building their wealth in tandem with a resurgent American economy, while the have-nots are out in the cold, all but certain to generate lousy returns in bonds and cash.

If you’re one of those with capital on the sidelines, I’ve got good news for you. There’s still plenty of time to get involved in this multi-year move, and there are still bargains to be had. You can start with my Top Ten list if you’re looking for ideas. Once again, my stock picks are running circles around the S&P 500, and I expect more upside in the months to come. Click here if you’d like to review the record.

On Why We Might Be in a Primary Bull Market

By the way, one stock that should be in every conservative and yield-oriented investor’s portfolio is General Electric (NYSE:GE), a stock that was in my last two Top Ten lists. It was recommended in my inaugural column for Seeking Alpha, “The Coming Decade of Stocks,” posted in November 2011. The comment I made at the outset of that column still applies:

“I’ll make it crystal clear, in no uncertain terms: The asset class to own right now – for the rest of the decade, even – is stocks. Not only are investors set to earn multi-fold gains over the remainder of this decade, but those gains are achievable with low risk.”

It was brassy to suggest multi-fold gains can be had in stocks, against a backdrop of 0% yields in cash and 2-3% in bonds, but it’s already happening. Compound my Top Ten 2012 list’s 79% return with my 19% return so far in 2013 and we’re already in multi-fold territory.

The stark dichotomy between returns available in stocks versus the returns in cash and bonds illustrates the problem with being out of the market. Investors need to see through bearish arguments that are keeping them out of stocks:

  • That the debt overhang will cripple any recovery
  • That the rapid expansion of the Fed’s balance sheet will trigger inflation
  • That profit margins are at all-time highs and certain to revert to the mean

I’ll take them one at a time.

Debt: We’ve got something on Greece when it comes to debt. We have a way out not available to them. We can grow our way out. The debt issue won’t be solved in the short term. But string together several years of healthy growth, and soon government coffers will be swelling with receipts. It’s our best chance to deal with the problem, and there are several multi-year catalysts in place to stoke growth: The housing rebound will last into the 2020s, there’s an emerging energy boom that even the most ardent bulls couldn’t have predicted, and the technological transformation of our economic paradigm continues to accelerate.

Inflation: This is tough variable to game, one in which I don’t have a strong opinion. Normally, a rapid expansion of the money supply leads to inflation, but this time, I’m not sure the causal link holds. There is a counterbalancing influence, namely, rapid deflation in many areas of the economy, not the least of which is technology-enabled. Gains in technology are leading to faster, better, cleaner, and lower cost of goods. Net out the deflationary and inflationary forces, and I’m not so sure a spike in inflation is a certainty. Several years from now, we might look back at this juncture in history and realize that an inflationary stimulus was a necessary countervailing force against deflation.

Peak profit margins: Profit margins are at all-time highs, it’s true. But it’s a canard to say that margins are doomed to revert to the mean. It ignores the unbundling of corporate operating structures, a secular trend that’s going to continue. It’s more efficient if Nike (NYSE:NKE) doesn’t make anything. They’ve kept the high-margin slice of their business, carving out the low-margin manufacturing slice and outsourcing it to others.

For investors on the sidelines, it’s time to dip your toe in the water. A long-term bullish posture is reasonable. The preconditions for a real top are nowhere in sight: complacency, rich valuations (18-20 PE’s), widespread enthusiasm for equities. We’ll get scary pullbacks from time to time, just enough to chase marginal investors back into their bunkers, but they’ll be relatively innocuous, transitory affairs. The “happy takeaway,” as I called it a few months ago:

“It's going to take years to rebuild confidence and enthusiasm for equities, to get to the level of complacency necessary to put a top on the market. In the meantime, for investors who can see through the pessimism, it's a great time to build your nest egg.”

Disclosure: I am long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.