Investors world wide are running for safety and who can blame them? Certainly, no one really knows whether Greece will leave the Euro and, if it does, what the political and economic fall out will be. Savers in Greece are withdrawing Euros from their bank accounts to hedge against introduction of the Drachma. Savers in Spain and Portugal, in smaller numbers, are doing the same. Everyday, a European systemic banking crisis looks more possible. Besides keeping money at home, what to do? Buy bonds, you say, but which ones? International investors have off-loaded Greek and Spanish and even Italian sovereign and corporate debt by the boat load with domestic investors taking up the slack. Now, everybody wants a German bank account and German bonds. Equities have barely been mentioned. There is even discussion that there are too few fixed income instruments to meet demand.
It seems that the old cult of equity has died. Or has it? From 1900 to 2010, U.S. equities outperformed inflation in the U.S. by 6.3% compared to 1.8% for bonds. This is according to a widely used benchmark maintained by the London Business School. Since 2000, however, two stock market crashes have caused investors to lose faith in equities. In fact, equities have not been so cheap relative to bonds since 1956 which turned to be one of the best moments in history to have bought stocks. If you are old enough, you might just remember that the Suez Canal crisis was in full swing and the Mid - east looked ready to explode. The more things change, the more they same the same - fast forward to 2012.
To paraphrase Ben Stein, former Chairman of the Council of Economic Advisors under Nixon , "Things that can't go on forever - don't." Government bonds are expensive, due to quantitative easing and perceived havens from risk, may soon turn negative meaning investors pay for the privilege of lending to the government.
When that happens, investors will start looking at equities with a different eye. The question is when. For the moment, however, markets are politicized and, as a consequence, distorted and risky. And another dynamic is at play - a reduction in supply of equities. Companies are buying back their stock as valuations get too cheap and with interest rates this low, acquisitions are being funded with debt at the expense of equity issuance. So the pool of equities continues to shrink while money sits on the sidelines.
At some point the stock market will experience a huge rally. Not having some exposure to equities is analogous to missing one's flight by being late to arrive at the gate except, in this case, it's more like waiting for charter flight that you know is leaving but whose departure keeps getting postponed. This is where fundamental analysis is critical. Investors need to be vigilant and know what they want to buy when this market turns. Using watch lists that MarketGrader has on its site is great way to monitor stocks without committing funds.
We all are familiar with the old adage that just as the world seems be coming to an end, opportunity is at its greatest. Even though things are beginning to look bleak, equities will have their renaissance and those in the know will be ready.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I could not find your feedback regarding my previous submission. All I want to do now is out this out as an instablog.