The past five years have undoubtedly been harsh on investors, especially those nearing retirement. Every time the stock market so much as takes a breath, investors panic, piling into Treasury bonds.
As I've previously discussed, Treasury bonds are no longer a "safe haven" -- they're a bubble that, in the near future, is going to burst. (In the future, the end of the "Treasuries-are-safe" myth may be viewed as an event on par with the housing bubble burst.)
Investors really only have one major option besides bonds: stocks. If you're a retail investor, you may feel hesitant to invest in domestic equities. After all, domestic stocks plunged in October 2008, wiping out significant chunks of IRA balances. For many people, that sting still feels very real.
But the truth is that the market conditions now are completely different from what they were in 2008. The truth is that the lines you've heard your whole life -- that "bonds are safe" and "stocks are risky" -- just aren't true anymore. (As I've already discussed why Treasuries are no longer safe, I'm not going to do so again here. If you're curious, I'd encourage you to read that article I referenced earlier.)
Below, I'm going to lay out several macroeconomic-outlook reasons why US equities are actually a more attractive long-term investment than they have been for a long time. It is my firm belief that U.S. stocks will, over the next few decades, be in the next great secular bull market.
Bull Sign 1: American Corporations Stronger than Ever
While recessions are obviously terrible for Americans' portfolio health (and quality of life as well), there's a silver lining in the cloud: recessions can act as a sort of evolutionary pressure. If you will, a Darwinian selection: survival of the fittest.
Although the recession led to many companies closing doors, those remaining are seeing record revenue and profit margins. Companies in the S&P 500 are, in fact, 11% more profitable in terms of revenue per employee than they were in 2007. In terms of absolute profits, S&P 500 companies have seen a 95% jump in profits since 2008. The recent quarterly earnings were cumulatively the third highest on record for the S&P. The recession prompted corporations to focus on what worked and what didn't. As a result:
U.S. companies became leaner, meaner and hungrier.
- Sung Won Sohn, former chief economist at Wells Fargo
Domestic companies are increasingly investing more capital in growing their operations. S&P companies boosted capital spending by 19% last year, and despite shaky conditions overseas in Europe, blue chips are continuing to invest in their future.
Companies are also stronger in another way: they have an enormous sum of cash in their vaults, and many are completely debt-free. This cash (something many didn't have in 2007-2008) provides them with more of a cushion in case of another credit crunch. It also provides them with the ability to plow money into investments -- and hiring -- whenever they see opportunities emerge.
Bull Sign 2: The U.S. Labor Market is Improving
A common complaint is that U.S. corporations aren't putting enough of their capital into hiring new workers -- hence the high unemployment rates.
While many companies are still cautious about dramatically expanding payrolls, the U.S. labor market is still showing signs of strength. Many states have provided tax and regulatory incentives for manufacturers that choose to bring jobs back to the U.S. from overseas -- a process known as "insourcing," essentially the opposite of outsourcing -- and it's working. Due to favorable conditions in the US and worsening conditions overseas, big companies like Caterpillar (NYSE:CAT) and Toyota (NYSE:TM) are bringing manufacturing jobs to the U.S. Projections estimate that once complete, this process will create between 600,000 to 1 million direct jobs in manufacturing, and another 1.8M to 2.8M support jobs.
The U.S. manufacturing movement is getting so strong that one-third of executives at manufacturing companies with sales of over $1 billion are either already moving production jobs into the U.S. or are considering doing so.
While the monthly jobs data may not be sterling, keep in mind that the difference between "trading" and "investing" is the difference between short term and long term. In the near future, statistics may look bleak. But especially in context of the corporate cash hoards and capital expenditures I established in the first section, I'm not worried about the future of the U.S. economy.
Bull Sign 3: Investment Distribution and Pricing
The general consensus is that U.S. stocks are cheap right now. Simply: domestic stocks are trading at P/E (price to earnings) levels that are approximately 13% lower than the historical average, and in the context of corporations' current strength, this is an unfair valuation.
The low valuations aren't all bad, though -- they present great buying opportunities, which is why famous billionaires like Warren Buffett and John Paulson are scooping up stocks like there's no tomorrow. Bruce Berkowitz, the Morningstar Manager of the Decade, is also buying stocks. These smart investors are buying stocks while everyone else is fleeing to Treasuries. Why?
Because the U.S. is entering the next secular bull market. U.S. corporations are stronger than ever. They have cash. They have a great-looking labor market. And best of all, domestic equities are extremely underpriced. Those who ignore the past are doomed to repeat it. The bond bubble will burst and U.S. stocks will rise.
To summarize what I just said: stocks are cheap. Stocks are cheap. Stocks are cheap. They're not as cheap as they were after the 2008 crash, but in absolute terms, they're still undervalued. So go buy some.
Recommendations: Buy U.S. Stocks
This section's pretty simple. My recommendation is to buy domestic equities. (Standard disclaimer: perform due diligence before making any investment to see whether it's suitable for your financial circumstances and goals.) There are several ways you can do this:
- You could buy shares in an index ETF like SPY or DIA for broad exposure to the U.S. stock market
- You could buy shares in a top-rated mutual fund. Check with Morningstar or your broker for a screening tool to track mutual funds' performance and ratings.
- You could buy a sector ETF or mutual fund for exposure to sectors like the chemicals industry with particularly strong growth prospects.
- If your portfolio is large enough, you could do some research on U.S. companies and create a diversified portfolio of individual stocks. Tim McAleenan's recent article, What a Perma Bull Portfolio Looks Like, lists some great blue-chip companies you can't go wrong with. My favorites, which partially overlap with his, include: 3M (NYSE:MMM), Berkshire Hathaway (NYSE:BRK.B), Procter & Gamble (NYSE:PG), Colgate Palmolive (NYSE:CL), Clorox (NYSE:CLX), Kimberly Clark (NYSE:KMB), McDonalds (NYSE:MCD), Coke (NYSE:KO), Pepsi (NYSE:PEP), Johnson & Johnson (NYSE:JNJ) , Kraft (KFT), General Electric (NYSE:GE), Wal-Mart (NYSE:WMT), Anheuser Busch (NYSE:BUD), Abbott Labs (NYSE:ABT), Exxon (NYSE:XOM), Chevron (NYSE:CVX) , Conoco Phillips (NYSE:COP), Intel (NASDAQ:INTC), IBM (NYSE:IBM), AT&T (NYSE:T), Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), and Bank of America (NYSE:BAC).
Whatever you do, just promise not to buy Treasuries. Because of the abnormal yield curve and suppressed interest rates, capital invested in T-bonds is at more risk than capital invested in the broad U.S. stock market.
If you're predicting a short-term dip and are consequently worried about putting large amounts of capital into the market, I'd recommend using the dollar cost averaging method to spread your investment over time.
Conclusion: A Brief History Lesson
Imagine that it's the start of a brand new century. You're going to live for 112 years, and you have $10,000 to invest in the Dow.
A traveler from the future shows up and tells you that within the next century, there will be:
- Two global wars that will kill over 70 million people combined
- One of the most severe economic downturns the world has ever seen
- A Presidential assassination
- Riots in the streets
- Another extended war killing thousands of American soldiers
- An attempted terrorist bombing of the World Trade Center
- A successful terrorist attack on the WTC, killing 2,977
- A housing bubble and a worldwide financial meltdown
Would you want to invest in the Dow? Seems scary.
But the truth is, all of those things happened from 1900-2012. And even if you'd sold at the very bottom of the 2008 market crash, your $10,000 would have grown to over $960,000. (Note: not inflation-indexed.) If you sold your investment today, you'd have over $1.9 million dollars.
The moral of the story: history is on the side of those investing in domestic equities, especially towards the end of bear markets. They really are a good place to put your money right now. The 2008 crisis may still hurt, but as I've established, there's a strong case for stating that we're about to enter the next secular bull market.
I'll leave you with a quote from a pop punk song by Yellowcard called "Believe."
Everything is gonna be alright.
Everything is gonna be alright.
Everything is gonna be alright.
Be strong. Believe.
It may be hard to put your money back in the very place you lost it, especially when all the headlines paint a bleak picture of the global economy. But things are always darkest just before the dawn. In the long term, American stocks will perform very, very well. The buying opportunities available today may not be around for long. That fact, combined with the absurdly high price and low yield of Treasuries, makes right now the perfect time to add positions in domestic equities.
So go buy some good ol' U.S. stocks.
Additional disclosure: I am long domestic equities via various mutual funds and individual holdings. I am long the chemicals/materials sector via the Fidelity Select Materials Portfolio (MUTF:FSDPX).