"Invest in stocks? Forget about it." — USA Today headline, 8 May 2012.
As contrarian investors we cannot help but take notice when one of the most widely read newspapers in the US reports that Main Street has lost interest in the stock market. It brings to mind the infamous 1979 Business Week magazine cover that pronounced the "Death of Equities" after a decade of dismal stock market returns. The consensus view at the time was that inflation hedges were the best place to be. Energy stocks glittered, as did gold and other commodity plays.
Jonathan Brodie, from Allan Gray's offshore partner Orbis, examines how this advice panned out as he takes a look at various market gyrations over the last five decades…
Contrary to the forecasts, in the 1980s inflation hedges turned out to be the worst place to put your money.
Bonds were the best and equities came back from the dead. But the real excitement was in Japan, which quickly became the next market darling. In the latter half of the decade the Nikkei 225 Average nearly quadrupled in value and stood at an all-time high of nearly 39 000 by year-end 1989. By then books on Japanese management techniques topped the bestseller lists and became required reading at top business schools.
But we all know what happened next. The Nikkei lost half its value by early 1992 and would halve again by 2003.
By 1999 — two decades after Business Week's story — opinion on US stocks had come full circle.
Witnessing recent experience, and armed with the apparent certainty that the S&P 500 had never seen a 10-year loss, forecasters now argued that large-cap US stocks were essentially risk-free. The Japanese management books were long gone from coffee tables, replaced by new best-sellers such as Dow 36 000 and Jeremy Siegel's Stocks for the Long Run. The internet was christened "the next big thing" and Cisco Systems became the most valuable company in the world, priced at over 100 times earnings.
As is well known, the tech bubble subsequently burst, taking the Nasdaq down 70 percent by 2003. Cisco's shares collapsed 85 percent from their peak. On the third anniversary of Dow 36 000 the Dow traded below 8000 and the S&P 500 would go on to post its first 10-year loss by the end of the decade.
In the aftermath of the technology, media and telecommunications (TMT) bubble, the US Federal Reserve moved aggressively to support asset prices. Together with financial engineering and a belief in sure-to-rise housing prices, this liquid courage fuelled a leveraged fiesta in US real estate.
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