I heard a consensus developing around the idea that stocks are the asset class of choice for the long run and the recent 40% plunge in large-cap prices was more or less the sort of noise a professional advisor must put up with from time to time. The advisor's real job, they seemed to agree, is to keep clients from bailing out of equities in a bear market so they can enjoy the long-range benefits of a 60% to 80% exposure to stocks; 50% was considered "very conservative."
Another consensus was a general fear of any style that smacked of "market timing." Most even shunned "tactical allocation" strategies, other than perhaps to slightly favor small-cap or value in the hopes of edging out an index benchmark. There was a great deal of concern about style drift, a dislike of "concentrated" equity funds as poorly diversified and a religious avoidance of long-term bond maturities. In general, it seemed to me that the advisors I met with were concerned about neither inflation nor deflation, recession nor slow growth, high valuations nor the possibility that the U.S. stock and bond markets might be inhospitable for the next few years.
Complacency Or Discipline?
Grantham listed some core beliefs of modern investment professionals that he believes helped set the stage for bubble pricing in stocks and bonds and that help explain why this condition persists despite continuing economic malaise:
Benchmarking
Career risk/momentum
Belief in market efficiency ("Fama Effect")
Stocks always win (Siegel effect)
Anti-market timing (Ellis effect)
These convictions were certainly evident in my breakout group; a fervent adherence to a working assumption that "the market" will continue to reward broadly-diversified, high-equity-allocation portfolios with returns of 7% plus inflation over time, and that one wanders from the prescription at one's peril.
Compared with the raucous nature of free-market capitalism in Sandburg's industrial Chicago, it struck me that there was something unnatural about the calm disdain accorded the speakers' data and their assessments of economic and market risks. Maybe in the 100 years that separate the old stockyards from this upscale academic setting the capital markets have really become gentrified. Maybe because so many workers are now also owners of capital, the struggle between wages and profits will be orderly and polite. Or could it be that the efficient market theory has lulled many of us into a false sense of security, a complacency of the well-fed. Are we so comfortable, wrapped snugly in our academic theories, that we don't notice that the temperature is dropping and the wind is picking up?