A big fuss was made over the Goldman Sachs (GS) call yesterday advising clients that equities will be the better hold than bonds for the next few years. Here are three links recapping the call here, here and here.
Before getting too excited I would remind that it is very difficult to predict what equities will do for one year let alone several years.
I would zoom out on a few points of how markets and cycles tend to work. The US stock market historically has had an up year just under 75% of the time, returns are not linear so often a large portion of the gains for an entire cycle will come in just one or maybe two years. Within a cycle it is likely there will be a big up year, a big down year and then several years of relatively muted results.
In 2009 the SPX was up 23%, in 2010 it was up 14% and last year it was flat. My thoughts for 2012 have been a big rally during the year that mostly retraces such that the year finishes up a little. If 2012 were to be up a little in the fashion I think will be the case or better than up a little then that would be four years without a large decline in a sequence similar to past cycles which paves the way for a down year in 2013. This conclusion is about how cycles often play out not about fundamentals and of course could be wrong. It is certainly not a given that 2012 will be an up year even though there are cyclical factors that support the year finishing at least a little higher.
Despite the worst financial crisis having exaggerated some of the volatility attributes of the market it does not appear to me to have altered the pattern of how the cycle is playing out. Of course time may invalidate this but for now this seems to be the case.
My thesis from many years back is that equity market growth would be less than it used to be in the US and Western Europe. I have felt that other markets like the Scandies, Anitpodean and certain emerging markets will be where growth comes from. The thing I take from the Goldman call is the possibility that the US and maybe Western Europe won’t be such heavy anchors on global equity returns. During the crisis there were plenty of foreign markets that seemed to be dragged down more than was justified because of the fear created by the crisis. Market decline or lift for reasons that are unjustified all the time but the crisis is an easy one to point to.