The Rumors of Stocks' Death Are Greatly Exaggerated -- Again

Investors are moody. But when it comes to their views of stocks, they can be downright manic-depressive. Assets ranging from bonds to commodities to real estate have had their hot streaks, only to be abandoned later, of course. But when it comes to equities, long bull markets inspire the view that investors in stocks can't go wrong, given enough time. And dismal decades like the current one tend to be greeted with proclamations that the party for stocks is permanently over.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Investors need to be more levelheaded, though. Much of the analysis lauding stocks focuses on a narrow and unique span of American history that may not be repeated. But investing in the world's best companies through the U.S. stock market may still be the best way for investors to participate in the massive amounts of growth still taking place across the globe.

Bonds Are the Better Buy, and Always Will Be (Well, Maybe)

The latest warning forecasting doom for stocks comes from Institutional Investor magazine. The current issue argues that investors are poised to flee equities permanently following disastrous returns. Some have noted the parallel to the infamous BusinessWeek cover story declaring "The Death of Equities" some 30 years ago -- a prediction that fell flat when it was followed by a 25-year bull market in stocks.

Given the horrible returns for equities following the last market crash compared with much safer investments, some of the despondence is understandable. At the end of September, long-term U.S. Treasury bonds had beaten stock returns over the last 28 years, and bonds had outperformed stocks over the last four decades as measured by February stock market lows, Institutional Investor notes.

But extrapolating from such selective slices of data -- while tempting -- can also be misleading and contradictory. While it's true that baby boomers approaching retirement may prefer safer bonds over stocks, and thereby reduce the potential base of stock buyers, recall that 30 years ago, supposedly just the old and clueless were still holding on to stocks, according to BusinessWeek. "Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks," the magazine claimed.

Now, Institutional Investor is saying younger investors are shunning U.S. markets for faster growth overseas. But about half of the revenue for S&P 500 companies is already generated internationally. And with better governance, more accountability and less currency risks in U.S. markets, American companies with international exposure may be a better way to tap global growth. Indeed, the sharp collapse of international markets during the financial crisis served as a stark reminder of the massive volatility that comes with investing overseas.

A Permanently Bullish Trend?

The urge to write off equities entirely in the wake of major disappointments has precedents: It's the flip side of the euphoria that kicks in following stock market booms.

During the last bull market, stocks were thought to have reached a permanently bullish plateau with a 36,000 mark in store for the Dow Jones Industrial Average. Even without that lofty target, prominent experts argued that stocks had consistently outperformed other asset classes over longer time frames and warranted special investor as a result.

But that outlook was also based on a narrow and often self-reinforcing set of data. In a precursor to the housing bubble, considerations about volatility were thrown out the window as stocks seemed to move only upwards. And using criteria that traditionally evaluated safer bond results cooked up conveniently high stock targets as a result.

The American Century Skews the Numbers

And the case for stocks being a sure thing over the long run rested on a very selective sampling of history as well -- largely the modern American economy. But it's little surprise that American businesses got a major tailwind over a long period during which the U.S. won two World Wars and a Cold War, and saw the dollar adopted as the world's currency. The problem is assessing how much those conditions will apply in the future.

''This was the most economically successful century for the most economically successful nation of all time,'' Robert Shiller, the noted Yale economist, said in 2001. ''It will not necessarily repeat itself.''

The same skepticism should be applied to anyone who assumes that the stock market's results in the wake of the worst financial crisis since the Great Depression represent the status quo.
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