A reader who works in the industry emailed me over the weekend and commented that he believes “the future for investing will be much different than the past.”
I generally follow the line of thinking. I have been writing about the evolution of investing from the start of this site, exploring the merits (or lack thereof) of new types of asset classes and have implemented a couple of these types of investments in client accounts.
That the investment world is changing is something I can buy into but it is difficult for me to wrap my head around the idea that a bell rang in late 2007 marking the end of equity investing as we know it. My expectation was that over a longer period of time equities would become less compelling for an extended period consistent with my past comments about equities averaging closer to 5% over time not 10%. Further I would have expected such a transition to be much quieter than the fast 50% decline for the broader averages.
Reading that a shift away from equities should theoretically be slower and quieter you might reply that the shift is not over the last 15 months but the last ten years. That might be correct of course but cutting in half as we did from 2000-2002 was not unprecedented. The market does that every few decades but never twice in a decade (that I am aware of).
While the second 50% decline this decade works against my thesis I had one thought that supports equities not being dead. As the current bear market started in 2007 market participants had a certain knowledge of history and truisms of how markets work and many people in the market in 2007 were also in the market in 2000. However there were far fewer people in the market in 2000 than were in the market in 1973. Point being that if you have survived a 50% decline previously you are less likely to be scared out when the next one comes along.
The fear created in 2002 was new for enough people that it allowed for emotion to peak and stocks to bottom. The fear created by the second 50% decline is less than the first one which prevents emotion from peaking at the same level as before so it prevents stocks from bottoming at the same level. Put differently, perhaps we need a lower level on SPX to create the same fear that created a bottom in November 2002.
If this is true then it may not be the end of equities just a larger decline to create the bottom. FWIW I do not believe it is the end of equities, I believe returns will be lower than average which is not the same as the end of them altogether. To be clear about one thing this post is an exploration of market psychology not a discussion of the current fundamentals.