Fearful Rise of Markets: A Contrarian View of Stocks

by: Larry MacDonald

In his recent book, The Fearful Rise of Markets, Financial Times editor John Authers has some contrarian perspectives on the “stocks-for-the-long-run” view — which holds that there is not much risk to owning stocks over the long run given many empirical studies show stocks have earned an average 8% to 10% per year over the past century or two. And this return is more than double the return on the second-best asset, bonds.

These studies were pretty solid and convinced many institutional, professional and individual investors to allocate “ever more to equities, safe in the knowledge that in the long-run, they would do best,” writes Authers. The result, over the 1990s and into the 2000s, was a substantial inflow of money into stocks that pushed prices up to levels that might not otherwise have occurred. So it may be possible that some, or even much, of the equity premium already has been discounted for the next 10 to 20 years.

Another consideration is time contingency. Sure, empirical studies have shown stocks handily outperform fixed-interest vehicles.

But the historical era for which we have the most complete data involved a long period of peace and prosperity as the world recovered from two world wars, abandoned communism, and enjoyed many technological advances. There is no reason to assume this can be repeated,

Authers cautions.

He also points out long-run returns on stocks can be contingent on geography.

During the twentieth century, all but three countries outside the United States had at least one period of at least 20 years in which equities failed to beat inflation. Developed countries like Japan, Italy, and Germany all went for periods of about half a century in which equties lost money.

Authers concludes:

The assumption that the ‘long-term’ would always bail out equities was always a lazy one.