It's hard to deny that events playing out over recent months have borne any eerie similarity to those of the first half of 2008. Worrywarts fear the slow motion train wreck in Europe, followed repeatedly by reactive measures and stopgap solutions, are leading up to something far worse.
The flow of mutual fund money out of equity funds into fixed-income vehicles underscores the increasing uneasiness of many investors. But the real question is which crowd is wrong, retail or professional investors?
Rarely has there been such a uniform consensus among professional investors, particularly the titans of the bond market, that equities are the favored class. From Pimco's Bill Gross to BlackRock's Larry Fink to Loomis Sayles' Dan Fuss to Oaktree Capital's Howard Marks, the world's largest distressed debt investors, there is widespread agreement that the fixed-income markets need to be navigated gingerly.
This doesn't mean they are raging bulls about stocks by any means. Instead, they are positively skeptical about bonds. The only question is when, not if, a secular bear market for bonds begins. Ironically, that event should coincide quite nicely with the beginning of a wave of baby boomer retirements that could have implications more far-reaching than the lost decade for equities that began in 1999 and shows little sign of ending.
One advisor recently showed me a chart developed by some fixed-income experts, sophisticated mathematicians who run some of the world's largest hedge funds. Prior to the financial crisis, equity markets were pricing 3% earnings growth; today, they are priced for negative earnings growth.
None of this means we couldn't experience yet another disaster in less than 13 years. An uncontrolled deleveraging in Europe could prove contagious globally. But as Philip Orlando, Federated Investors' chief equity strategist told attendees at Pershing's annual Insite conference, the chief of the European Central Bank, Mario Draghi, earned his Phd. studying along side Fed Chairman Bernanke at M.I.T. and he is far more imaginative than his predecessor, the dour Jean-Claude Trichet.
Any one of a number of black swans could wind up in your clients' portfolio-though if the entire world fears a Euroquake, that event wouldn't be much of a surprise. While another big equity market decline is a possibility-it's unlikely to last for a long time, when securities are priced at these levels.
Rates of economic growth and equity market returns could well prove to be lower in the first half of the 21st Century than in the prior 50 years. This doesn't mean that a bunker strategy isn't a fool's errand.
Evan Simonoff, Editor-in-Chief
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