In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Animal Spirits Are About to Be Revived
03/23/2009 12:00 pm EST
Tim Middleton, contributor to MSN Money, says markets are so low now that making money over the next five years will be as easy as shooting fish in a barrel.
Eighteen months into the worst bear market since the Great Depression, investors seem divided into two camps: those who have thrown in the towel and those who are getting ready to throw in the towel.
Adding fuel to the fire is my old friend Bill Gross, the chief investment officer of Pacific Investment Management and the world's most powerful bond investor. The "bond king" announced "the death of equities" in an interview published last month on the Daily Finance Web site.
As the Web site FundAlarm pointed out almost immediately afterward, we've heard this argument before, most famously in 1979 from BusinessWeek magazine. Its death-of-equities cover story was belied by the biggest bull market in history shortly after the magazine rubbed its face in this egg.
The recent explosive—and global—rally might already be proving current pessimism wrong. Markets are so low—and I mean all markets, every single one except US Treasury bonds—that making a fortune over the next five years will be easier than shooting fish in a barrel. Indeed, you don't have to aim at individual fish; hitting the barrel will be enough.
At their nadir before last week's rally, domestic markets were down more than 55% from their peaks in October 2007. Some sectors have done even worse, most notably small-company and financial stocks.
But corporate profits haven't gone down that much. The extra drag on stock prices has been the decline of price-to-earnings multiples, to about 11x this year's expected earnings from around 20x as recently as 2003 and nearly 30x in 1999.
That tells me a big part of the rout in stock prices has come purely from emotion. These are the "animal spirits" that John Maynard Keynes spoke of and that Gross specifically referred to in his Daily Finance interview. "Risk taking has been destroyed," he said, "and any animal spirits must come from Washington."
But animal spirits were abundant and universal [in the recent rally], with world exchanges going up as much as 5% day after day. In fact, it was Citigroup's (NYSE: C) statement that its earnings were less awful than expected that sparked the big rally.
How to ride it? Simply get on board, no finesse required. The barrel is "the stock market," so buy a whole index.
The ultimate one-stop solution is the Vanguard Total World Stock ETF (NYSE: VT) exchange traded fund, which has roughly half its assets in the United States, 40% in the rest of the developed world, and 10% in emerging markets.
Of course, this rally could be temporary, what's known as a bear market rally. But the earnings data tell me that, long term, we're not going much lower, and we won't stay lower.
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