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A Bad Decade For Stocks

Thursday, December 31, 2009, 9:29 AM

First, happy new year everyone!  In fact, happy new decade. 


Here I want to quickly review the investment classes over the past ten years to see how they did starting with my largest personal holding for the decade - gold. 


It's easy to find articles that bash gold as an investment. For some reason, there's real antipathy towards the yellow dawg out there in the establishment investing community.


I know all the reasons; it doesn't produce a return, it just sits there, you can't eat it (but who eats stocks & bonds?), and so forth.


But the thing I find interesting is that I believe this antipathy was developed a very long time ago when gold was a very unattractive investment.  During the 1980's and 1990's, gold did nothing but fall.  So I understand how a sour impression could have been developed over that period of time.


It is known that in the medical profession it takes 10 years for a good, life-saving treatment to fully penetrate the medical community.  You'd think something that is a proven winner would gain more favorable adoption, but that's not the case.


Resistance to change is a very human thing, and investment professionals may be just about as resistant as any group.


Here's a recent article:


Gold's not-so-great returns



Something to remember if you're thinking of buying gold at its current high levels: If you bought during the last peak (in January 1980), you would have been better off with an interest-bearing checking account .


Back then, gold was $850 an ounce, Bloomberg reports. If you had bought gold and held on to it, you would have earned about 44%. Gold recently passed the $1,220 mark.


The average U.S. checking account rose at least 92% during that time, Bloomberg reports. And the S&P 500 index had a 22-fold return with dividends reinvested.


Now, this is really an amazing article in that it picks as the starting point the absolute high mark for gold, during a two day blow-off event in 1980. That's known as "cherry picking" and it is not sound analysis. We could have just as easily picked the all-time high in the S&P to make our comparison and the results would have been turned completely upside down leading to entirely different conclusions.


At any rate, leaving that obvious defect aside, I merely want to note that there's a pretty strong bias against gold and towards stocks in this article, like many others you will read.


Instead, I'd like to show you the returns across all major tradable asset classes for this past decade:



 


Here we see that over the past decade, gold had the best returns, then commodities, then oil, then high grade bonds, and then Treasuries.  Stocks?  They coughed up negative returns for the decade.


Well, I guess a decade isn't long enough to change impressions in some corners of the investing community…


As we scan back over the past decade - possibly the worst on record for stocks, even edging out the Great Depression era - we search for clues as to where we might be headed and what will constitute a good place to store one's wealth.


For me, knowing all the monetary and fiscal recklessness that continues to infect our key decision-makers, I am quite a bull on the inflation theme.


On a near-term basis, I am leery of stocks for a set of reasons that John Hussman laid out quite beautifully recently:



Last week, the dividend yield on the S&P 500 dropped below 2%, versus a historical average closer to double that level. While part of the reason for the paucity of yield in the current market can be explained by the 20% plunge in dividend payouts over the past year, as financial companies have cut or halted dividends to conserve cash, the fact is that current payouts are not at all out of line with their historical relationship to revenues, and even a full recovery of the past year's dividend cuts would still leave the yield at a paltry 2.5%.


The October 1987 crash occurred from a yield of 2.65%, which was, at the time, the lowest yield observed in history, matched only by the 1972 peak prior to the brutal 1973-74 bear market.


Those two periods had a few other things in common. In the weeks immediately preceding the market downturn, stocks were overbought, had advanced significantly over prior weeks, bond yields were creeping higher, and investment advisory bearishness had dropped below 19%. All of those features should be familiar, because we observed them at the 1987 and 1972 peaks, and we observe them now.


On the basis of normalized profit margins, the average price/earnings ratio for the S&P 500, prior to 1995, was only about 13.


The pre-1995 norm of 13 for price-to-normalized earnings is important, because at present – and again, we are not using current depressed earnings, but properly normalized values – the S&P 500 P/E would currently be over 20. That's higher than 1987 and 1972, and about even with 1929.


Looking at dividend yields and p/e ratios, stocks are very over-valued right now and are endowed with an extremely bullish investor sentiment.  Add in the rising yields on Treasuries, and we've got a reason to be extremely cautious on the long side.  If I had any stock holdings,which I don't I'd be protecting them with puts (or selling them).


Longer term, and without factoring in another oil shock, I think that stocks will have to mean-revert to their historical earnings ratio compared to GDP, making for a decade or more of sub-par gains.


Another decade, I should say.


Still, I am open to being completely surprised by what comes next and will continue to keep my eyes open.  For now, it's probably best to apply a heavy filter to everything you read from mainstream journalists about money, gold, and investing.


As always, do your homework and trust yourself.

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6 Comments

ptf's picture
ptf
Status: Member (Offline)
Joined: Sep 19 2009
Posts: 8
Re: A Bad Decade For Stocks

This is an example of how easily the herd can be misled.  Chris is right.  When that little voice wells up from your subconscious and tells you “this isn’t right,” it probably isn’t.  Most people have had the self confidence beaten out of them.  It’s too bad.  It is really hard to try to explain to the uninitiated that there are people in positions of power that are actively trying to mislead them.  A great film to show to people is “Enron: The smartest guys in the room."  It’s a case study in financial malfeasance.  Unfortunately, it seems our national economy is following the Enron business model.  Pump and dump.

 

cwixom's picture
cwixom
Status: Bronze Member (Offline)
Joined: Aug 18 2008
Posts: 44
Re: A Bad Decade For Stocks

Chris,  I think you are correct in pointing out that there are extremes in the market that bode a bad wind, not to mention the complete train wreck that our government is making of this. 

The biggest problem is that the markets can remain irrational for long periods.  Therefore your advise to stay cautious is very good.  You don't know when it will turn down but having protective puts on or just getting neutral in the markets is wise at this point in time, and for heavens sake don't get suckered in by a last minute blast to the upside in the markets.

I was wondering if your site has been getting less attention in the past few months.   This could be difficult to decern given that you have the upward effect of people spreading the word about your site vs declining interest due to the economic cocain (TARP, cash for whatever, stimulas, etc.) that is flowing in the blood that feeds our national conscience.  However, I suspect that such a decline in interest would be yet another signal as to how close to the cliff we are getting.  A number of blogger I read who were hard line crash mongers earlier in the year seem to be hedging more in recent days, as though they too were spiraling into the event horizon of the Bernanke black hole. 

johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
Re: A Bad Decade For Stocks

Gold takes money out of the system, and places it into a medium they cannot control. they cant track what you do with it, and they cant "know where your money is sitting" where they can short right from under you. once you buy it; you can liquidate without "them"...they cant know what your long or short position is, like brokers can with stocks. gold takes away their power.

it is liquid without a broker, and is concealable. it doesnt cost money to hold, could be passed to heirs without accountants and lawyers, if one were so inclined.

they cant make constantly huge commissions on gold sales, because there is a limited amount, where stocks can be internally inflated by corporation through stock options, incentives, dividends.. i.e a constantly expanding float at the discretion of a corporate board, not any true work or production... and at the EXPENSE of current stockholders.

they dont like gold. gold is their enemy... and the enemy of my enemy is my freind.

bikemonkey's picture
bikemonkey
Status: Bronze Member (Offline)
Joined: May 17 2008
Posts: 45
Re: A Bad Decade For Stocks

Ah, but they can short gold out from under us, John.  THEY being the central banks instead of the brokers you reference.  (Was there ever really a difference?)

Fortunately (?), it looks like they have already been doing this for years, so it's already priced in.  And they (the central banks), appear to be losing the leverage they once had.  Once they lose control, gold may bounce to it's true value like a ball held under water.

for more information on this, see GATA.ORG

opusnz's picture
opusnz
Status: Member (Offline)
Joined: Apr 20 2009
Posts: 9
Re: A Bad Decade For Stocks

Thanks for a great article, Chris. 

I was wondering if you think equities may actually do well if people pour out of bonds and fiat currency due to rising inflation in the next few years.  Marc Faber and Peter Schiff have both been saying this may happen.  Zimbabwe had the best stock market in 2007 for this reason as people tried to buy things of real value as their currency collapsed.  Schiff has made the point that the best performing stock markets around the world are sometimes the most unstable.  Maybe the stocks will do well the next few years for this reason :). 

I think to really see what is happening in the markets, we should start valuing stocks in gold bullion rather than dollars to try to take the inflation/Fiat money factor out of the equation.  I am not sure how you can do this for a portfolio without a hassle. however. 

Cheers, and all the best in 2010.

 

 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: A Bad Decade For Stocks

The New Years crash starts Monday. 

Hope your wearing your "shorts" in January.

Thanks for the report Dr. M.

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