Business Week's "The Death of Equities" Revisited

I managed to locate the legendary cover story which was first published in Business Week magazine's August 13th, 1979 issue. The article offers a fascinating insight into the extremely bearish perceptions of an ordinarily upbeat publication. The article was published at a time when the Dow was languishing at 875 and had been trading in a see-saw fashion ever since topping out 6 1/2 years earlier in January of 1973. Inflation was a persistent nag on the economy and the Federal Reserve and US fiscal policies were held in low regard. The reason that I am presenting excerpts and a discussion on this 18 year old article is to exemplify how far sentiment has shifted since the summer of 1979. Currently, things (the economy, stock appreciation, government spending, consumer confidence, etc.) couldn't be better and there aren't any expectations that things will get worse anytime soon. In the "Death of Equities" article, Business Week found it hard for the same things to be any worse and there weren't any expectations for them to get better anytime soon. There are a lot of interesting viewpoints the article, and I want to try to include most of them along with my own comments. The synopsis of the article was: MONEY & BANKING The death of equities The masses long ago switched from stocks to investments having higher yields and more protection from inflation. Now the pension funds--the market's last hope--have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition--reversable someday, but not soon. Wall Street looks beyond stocks Moving into options, futures, buying into insurance Cover: Photograph of a downed paper airplane fashioned from a stock certificate The sub-caption for the cover of the magazine was "How inflation is destroying the stock market." The downed paper (stock certificate) airplane in the picture was actually surrounded by the crumpled remains of other "crashed" paper airplanes. Here is the first excerpt: ...Pension fund money can now go not only into listed stocks and high-grade bonds but also into shares of small companies, real estate, commodity futures, and even into gold and diamonds... To millions of people, that ruling could mean a higher return on their pension fund assets after years in which inflation has nibbled away at the return from mere traditional investments. On another level, the Labor Dept. ruling [for pension funds] is just one more in a nearly endless string of unhealthy things that have happened to the stock market over the past decade. Wow, diamonds as an investment over stocks. Real estate was a good move, but gold hit its peak in 1980 before beginning its long bear market which is still in place today. Here is another excerpt: Only the elderly remain At least 7 million shareholders have defected from the stock market since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks--and bonds--into other investments. If the institutions, who control the bulk of the nation's wealth, now withdraw billions from both the stock and bond markets, the implications for the U.S. economy could not be worse worse. Says Robert S. Salomon Jr., a general partner in Salomon Bros.: "We are running the risk of immobilizing a substantial portion of the world's wealth in someone's stamp collection." Until now, the flight of institutional money from the financial markets has been merely a trickle. But it could turn into a torrent if this year's 60% increase in oil prices touches off a deep recession while pushing inflation sky-high. As it is, the nation's financial markets and its capital flows have been grossly distorted by 13 years of inflation. Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds--infinitely safer--rarely paid more than 4%. Today the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade. Amazingly, the article seems to be suggesting that stocks are no longer a better investment than bonds. This of course, is the exact opposite of the current mantra which states that stocks always outperform other investment vehicles...especially bonds. The next excerpt is very suggestive of a capitulation to the idea that stocks always go up: Further, this "death of equity" can no longer be seen as something a stock market rally--however strong--will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms. In today's market, we are constantly bombarded on how Baby Boomers will keep it propped up as they save for retirement. The demographic argument was also used by Business Week's pessimistic article to describe how it would hurt stock prices: The problem is not merely that there are 7 million fewer shareholders than there were in 1970. Younger investors [Baby Boomers?], in particular, are avoiding stocks. Between 1970 and 1975, the number of investors declined in every age group but one: individuals 65 and older. While the number of investors under 65 dropped by about 25%, the number of investors over 65 jumped by more than 30%. Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks. I guess it was a good thing that the elderly didn't understand the changes in the nation's financial markets, because the Dow bottomed three years later before embarking on its current Great Bull Run. The next excerpt argues that we have entered a "new era" of stock investing and the "old rules no longer apply." Sounds like what we hear today, except this time, stocks are expected to go up. Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market. Yet the range of investment opportunities is so much wider now than in the 1950s that it is unlikely that the experience of two decades ago [the 1950s], when the number of equity investors increased by 250% in 15 years, could be repeated. Nor is it likely that Wall Street would ever again launch such a promotional campaign. The end of fixed stock market commissions has thinned the ranks of firms that sell stocks and reduced the profit from selling stocks for virtually all firms. Wall Street has learned that there are more profitable things besides stocks to sell, among them options, futures, and real estate, that it did not have in the 1950s. For better or for worse, then, the U.S. economy probably has to regard the death of equities as a near-permanent condition--reversible some day, but not soon. Says Alan B. Coleman, dean of Southern Methodist University's business school: "We have entered a new financial age. The old rules no longer apply." The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against this awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois. Indeed, since 1968, according to a study by Salomon of Salomon Bros., stocks have appreciated by a disappointing compound annual rate of 3.1%, while the consumer price index has surged by 6.5%. By contrast, gold grew by an incredible 19.4%, diamonds by 11.8%, and single-family housing by 9.6%. Diamonds? Apparently, diamonds were seen as a viable investment at the time but you certainly don't hear about them as such these days. In fact, hard assets such as gold and real estate were seen as less speculative than stocks: "Given the type of consistent high-level inflation we've been experiencing, the stock market represents speculation, and some tangible assets represent the opposite," says Edward R. McMillan, chief economist for Seattle's Rainier National Bank. Today, one of the strongest proponents of gold investing is Alaska Governor Jay Hammond. He plans to resubmit a bill to the legislature early next year to lift a law, passed in the early 1960s, that prevents the state's public employee and teachers retirement funds from investing in gold, foreign securities, or real estate. At least three other states are also interested in tangibles for their retirement funds. "The statute was fine for the 1960s, but unfortunately we're not living under those same economic conditions," says Alaska's deputy treasury commissioner, Peter Bushre. "We're living under double-digit inflation, huge balance-of-trade deficits, and a serious energy problem. The current action in both the bond market and equity market bear [pun?] me out." At the time, it was difficult for people to imagine that inflation would someday be much lower. Instead of looking towards possibly more benign economic conditions in the future, investment decisions were being based on the assumption that the current high inflation would extend indefinitely. Gold currently traded at about $300 an ounce at the time and although it did spike up to $800 the following year, it now trading at under $350 an ounce for a 17% gain over an 18 year period. The Dow has gained 740% since that time. The next excerpt discusses the death of the "nifty fifty" or the large cap, "one decision" stocks: Eccentric money markets ...For investors, however, low stock prices remain a disincentive to buy [so much for buying on the dips]. The only stocks that have done well recently have been hyper-growth stocks such as energy-related, gambling, high-technology, or fast-growing small companies. A decade ago, by contrast, the entire equity market was perceived as an inflation hedge. Then, in the early 1970s, large growth stocks, especially the so-called "nifty fifty" were in vogue as inflation fighters--until the 1974 recession dealt them a blow from which they have yet to recover. Unfortunately, hyper-growth stocks are not big enough to attract big institutional money. Private pension funds, for example which control some $300 billion in assets and are the single most important factor in the financial markets, put more than 120% of their new cash into equities in the late 1960s [a sell signal?]. To do so, they even sold bonds to raise money to buy stocks. Today the amount of new pension money flowing into equities is a minuscule 13% as the funds have built up their cash portions or stuffed their portfolios with short-term securities paying high rates. In short, the financial markets are so eccentric that for more than 10 years the largest returns have come from taking the fewest risks. Indeed by constantly rolling over short-term paper, investors have beaten returns on stocks and bonds... Equity mutual funds (which now total over $1 trillion in assets) were not always the favorites of investors. The next excerpt shows why I didn't find a single mutual fund ad extolling the virtues of investing in equities: ...In fact, the only reason the mutual fund industry has been able to survive the death of equities is the dramatic success of such funds, which invest in T-bills, bank CDs, and other short-term paper. Mutual fund assets now total some $65 billion, and of this amount, some $22 billion represents assets of money-market funds. And whereas stocks once made up 80% of mutual fund assets, today that figure has slumped to less than 50%. Clearly, money market funds--most of which allow investors to write checks on their accounts--will prosper until interest rates begin to ease. But even when rates do fall, the money will not flow back into the stock market from which it came. Indeed, putting life back into the U.S. equity market will be a long and difficult process. Unlike today, U.S. businesses and fiscal policies were held in very low regard compared to those of other countries: Other foreign stock markets such as those in Toronto, Hong Kong, and London have been doing as well or better [than the U.S. market]. One reason is the influx of U.S. money that a decade ago would have flowed into Wall Street. Atlantic Richfield Co., for one, will invest in foreign stocks for the first time this year. The company will take 3% of its U.S. equity allocation and put it into shares of companies based in Japan, Germany, Britain, and France. "The attraction is that these economies are growing at a rate equal to or better than our own and have business cycles different from ours," says Howard H. Ockelmann, the big oil company's investment officer. Undoubtedly, another reason for the surge of investment in foreign stocks is the negative attitude toward business in the U.S. "The Japanese do everything they can to make their strongest and most competitive companies do well. Americans attack their largest and most successful companies," says Andrew J. Hutchings, an equity manager for Royal Trust Co. in Toronto. The next few excerpts were from a companion article stating how even Wall Street was abandoning equities and were in a fight to stay alive: Wall Street looks beyond stocks As investors have fled equities, so Wall Street, to survive, has fled them, too. Indeed, the flight from equities, combined with the freeing of fixed brokerage commission rates on May 1, 1975, has changed the very nature of the securities industry. And while the industry has markedly fewer firms than it had, and thus should be sounder financially, the truth is that Wall Street's future still is very much in doubt. "Anybody who thinks that it will be easy sailing for Wall Street during the 1980s is dead wrong," says James Balog, senior executive vice-president of Drexel Burnham Lambert Inc. in New York. "There still are many problems that we must deal with." ...securities firms will continue to diversify away from equities, all the while hoping that the stock market will somehow regain some of its luster and make their task somewhat easier. At the same time, executives of those firms will be devising and implementing new long-term strategies, not really knowing whether they or their organizations will remain in the business long enough to reap the benefits from some of these plans. The final excerpt from the end of the article makes the conclusion that stocks are no longer the best long-term investment alternative for retirement savings. Whatever caused it, the institutionalization of inflation--along with structural changes in the communications and psychology--have killed the U.S. equity market for millions of investors. "We are all thinking shorter term than our fathers and grandfathers did," says Manuel Alvarez de Toledo of Shearson Loeb Rhoades Inc.'s Hong Kong office. Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared. Says a young U.S. executive: "Have you been to an American stockholders' meeting lately? They're all old fogies. The stock market is just not where the action's at." The Dow's final bottom occurred just three years later in 1982 after reaching a peak of 1024 in early 1981 (an appreciation of 17% in the two years AFTER the "Death of Equities" article). In August of 1982, the Dow hit 776 before embarking on its greatest bull run that has extended to the present after almost 15 years. Contrary to the article and its very pessimistic opinions and observations, the summer of 1979 would have a good time to invest in equities. It is very interesting that at a time when investors needed to hear that stocks were the best long term investment, Business Week was not up to the task of convincing them with an optimistic viewpoint. The article concentrated on the negative--positive developments were not anticipated. The article didn't even bother with any bullish opinions and the article was filled to the brim with pessimistic quotes from leading analysts. At present, we have come full circle. In the past year or so, Business Week has become the eternal optimist as opposed to the eternal pessimist as detailed in their "The Death of Equities" cover story. Two recent Business Week cover stories come to mind: "Our Love Affair with Stocks" (June 3, 1996), and the recent "The New Business Cycle" (March 31, 1997). These upbeat articles are almost completely diametrically opposed from the angst filled article written near the bottom of the secular bear market which lasted from 1966 to 1982. Business Week wasn't the only publication to print bearish stock market articles anymore than they are the only ones to print bullish ones presently. My main purpose of this analysis of an 18 year old article is to show how views become entrenched and foisted upon the public as if they will continue indefinitely. In the case of "The Death of Equities," Business Week felt that the ills that had hampered the stock market's performance for the past decade would continue into the future. The latest cover stories from the magazine indicate that the current stock market nirvana of the past 15 years will continue into the future. Time will tell if these optimistic cover stories will point to a secular market top as "The Death of Equities" cover story pointed to a secular market bottom.