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Friday, August 10, 2012

Cult of equities

PIMCO's Bill Gross stirred up a hornets nest with his article about the death of the cult of equities.  You can read it here.  http://www.futuresmag.com/2012/08/01/pimcos-gross-says-cult-of-equities-dying

If you google the cult of equities you will find many stories saying this is going to go down in history as a famous bullish sign.  Most of the articles reference a famous 1979 Business week article about the death of equities.  Here is a link to that article.  http://www.businessweek.com/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice

Lets start with a look at SPX from 1979.

The vertical line marks the month of the Businessweek article.  You can see there were better entries in 1980 and again in 1982, a full three years later.  It did not come out and stocks sky rocketed right away.  There are a lot of differences between now and then.  When that article came out, most people actually believed it was true.  Look at the response now.  Most people are saying it is a contrarian sign.  Exactly how can it be a contrarian sign if a big majority are calling it such.  I am just saying.  There are some other interesting differences as well.  Look at the household owner ship of mutual funds chart.

In 1980 a scant 5.7% of U.S. households owned mutual funds.  I could not find data on the percentage of those funds being equities at that time, but here is what the mix looked like in 2008.

At that time 80% were in equities.  At 80% that gives us about 4.5% of all households owned equity mutual funds.  Using the same method we would have 35% today.  Those numbers are not exact, but we can see there is a huge difference in ownership today.  This next chart backs that up.

In 1980 U.S. households had about 33% of their assets in equities as compared to 42% in 2010.  With the market up since then, I think it is likely that the percentage has not dropped much if at all from 2010.  Notice the high amounts of cash in the 1975-85 period.  Even though cash is up from 20% in 2000 to 27% in 2010, it is still very low.  I find it interesting that the secular bull market top in 1966 and in 2000 both had equity allocations over 50%.  People distrusted stocks so much in 1980 that when the market started up in 1982 the equity allocation actually went down into 1985.  A large part of that probably was caused by a big increase in bond prices as interest rates tumbled down.  Still, people were not piling into stocks yet.  The secular bull that ended in 1966 took off in late 1949.  We can see the equity allocation was about 37% at that time.  Since the ultimate low was in 1932, it is probable that the total allocation was even lower then that at some point.  It might have even been in the 20% range like it was in the 80s.  At the very least the last two secular bulls started with equity allocations in the 30% range.  At 42% now, it seems unlikely we are ready to go yet.

In the article on valuation (http://traderbob58.blogspot.com/2012/06/market-valuation.html)  I showed that we were nowhere near the low valuations seen at secular bear market bottoms.  Here is the P/E chart.

Does this look like we are ready to take off on a new secular bull market to you?  At the time of the 1979 article, the P/E ratio was under 10 and went even lower by 1982 when the secular bull took off.  It was under 10 in 1949 as well.

I suspect when history is written, it will say they should have listened, instead of, it was a great contrarian signal to buy.  I guess time will tell.


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