What really ignites stocks
If you're looking for simple explanations of the long secular bull market cycle that began in 1982 and trying to predict when the next bull-market cycle will begin, I've got a simple set of numbers to show you.
In 1977, the yield on the U.S. 10-year Treasury bond was 7.61%; in 1978, 8.41%; in 1979, 9.43%; 1980, 11.43%; and 1981, 13.92%.
Interest rates peaked in 1981, with the federal funds rate hitting 20%, as the Paul Volcker Federal Reserve raised interest rates to punishing levels to break an inflation rate that had climbed to 13.3% in 1979.
In 1982, the yield on the U.S. 10-year Treasury bond was 13.01%. By 1989, it had fallen to 8.49%. By 1999, it was down to 5.65%. By 2009, it had fallen to 3.26%.
And you know what? Yields on Treasury bonds have continued to fall as global investors -- a class dominated by institutional investors, for what that's worth -- have looked to U.S. Treasurys for safety in the eurozone debt crisis. The yield on 10-year Treasurys declined from 3.26% in 2009 to 3.22% in 2010 to 2.78% in 2011.
Falling interest rates and falling inflation are the best explanations for the long secular bull market. Absent those two closely related factors, individual investors could have loved stocks or hated stocks and we wouldn't have seen the bull market that stretched to breaking when the subprime mortgage crisis hit in 2007.
Still no love for stocks
In the environment since 2007, exactly how irrational have individual investors been in their preference for bonds over stocks? That drop in Treasury yields -- courtesy of the turmoil in Europe -- powered the Barclays Capital U.S. 5-10 year Treasury bond index to a total return of 13.95% in 2011. The Standard & Poor's 500 Index ($INX), on the other hand, was up just 2.1% in 2011.
The index was up an additional 1.4% in 2012 through May 29 as U.S. 10-year yields have fallen to 1.75%. (Bond prices rise when yields fall, benefiting bond investors.)
I think it's hard, on the basis of those performance numbers, to argue that the preference of individual investors for bonds over stocks is anything other than rational. Certainly, individual investors who have been long bonds in the past 18 months or so -- a period when a number of very good professional money managers have moved out of U.S. Treasurys -- have been very happy with their choice. At least compared with stocks.
Of course, it's equally hard to argue that this preference for bonds will pay off as handsomely in the future as it has in the past -- even the very recent past. After all, there is no way -- no matter how much turmoil the European debt crisis creates for yields on U.S. 10-year Treasurys -- to duplicate the 12.75-percentage-point drop in yields from 1982 to May 2012 if yields are already at 1.75%.
But there's a big leap of logic to go from arguing that bonds will generate paltry -- and eventually negative -- returns to a conclusion that stocks are on the verge of a new secular bull market. Rising interest rates and rising inflation (a potential result of a depreciating dollar) aren't a recipe for a secular bull market, either.
Good news: We can still rally
Fortunately, you can have major rallies without a long-term secular bull market. During the secular bear market of the 1970s, for example, the Dow rallied 58% from May 1970 to January 1973 before giving back all those gains and more. From December 1974 to March 1976, the Dow rallied 74% before falling 26% from March 1976 to February 1978. (And I'd argue that we could still have one of those sharp rallies this year in an otherwise sideways market if investors are convinced that China's stimulus efforts will work. Take a look at the strong rally on Tuesday, May 29, on a belief that China was about to increase economic stimulus.)
Unfortunately, it seems you can't have major rallies without a long-term secular bull market and escape stomach-churning volatility.
This pattern is why I've been trying recently to sketch in medium-term trading strategies that will take advantage of this volatility.
Finally, I'd argue that the financial markets aren't made up of just two asset classes, bonds and stocks. There are assets -- dividend stocks, for example -- that blend some of the performance characteristics of bonds and stocks. There are some niche sectors -- biotechnology and shares of Apple (AAPL), for example -- that aren't closely correlated to the larger asset classes. There's real estate, of course, either directly or through a real-estate investment trust. And finally, there is the vague but increasingly popular class called "alternative." (I've been doing my homework on "alternative" investments recently, and I'll report on the topic not too far down the road.)
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Are Spain's banks worth the risk?
- Copper mining drama boosts Freeport-McMoRan
- Why McDonald's still outdoes the competition
- Time to sell this oil-and-gas stock
- Weyerhaeuser will benefit from housing -- eventually
At the time of publication, Jim Jubak did not own shares of any company or fund mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Apple as of the end of March. Find a full list of the stocks in the fund as of the end of March here.
Meet Jim Jubak at the MoneyShow Las Vegas
MSN Money columnist Jim Jubak will be one of dozens of financial experts on hand at the MoneyShow Las Vegas, May 13-16, at Caesar's Palace in Las Vegas. And admission is free for MSN Money readers. Just click here to register, and click here to see what Jubak plans to talk about.
Can't make the show? You can log on live and watch Jubak's presentation on "3D printing in 30 minutes," as well as a panel discussion with Jubak and other MSN Money bloggers, "Top stocks from MSN Money's Top Stocks." Click to register in advance, then return for the free webcasts.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
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Investing has turned into gambling. Can you blame the average joe who has little to lose for staying away. A savings account paying .01% still beats a negative return. Without an inside edge it's hard not to lose your shirt. Remember all those people nudging you to buy netflix or green mountain? Who made out there? Working humps are tired of loosing money and seeing everything they worked hard for just slipped right out of their pocket and placed into someone elses. Many people lost their life savings during 08'09'. This was all on the advise of the professionals they were paying to manage their money.
Nothing about investing makes sense anymore. Every analyst is saying something different. The professionals who are supposed to manage our money and help it grow are loosing it by the bucket full. Strong profitable companies are enjoying modest price declines while fly by nights are soaring. When it makes more sense to throw your money into a slot machine than into the market, you'll never convince someone who's been burned to do the latter.
Wall Street has a partner that helps them fleece the average Joe and that is the federal government. By holding interest rates down to basically nothing this forces hard working people to take risks with there savings just to stay even with inflation. We are participating in the largest Ponzi scheme in the history of the world and it is being ran by the government. American banks and citizens hold more than 14 trilion dollars of this ponzi scheme debt and there is no way to stop this run away train.
Also, the big banks gamble everyones money knowing that the feds will bail them out if anything goes wrong. The honest hard working people in this country are being used and abused and laughed at by Wall Street. No corporation should be able to payout a divdidend until there retirement fund is in the black. Since all company employees participate in the company making money they should be paid a dividend equal to or greater than a stockholder. Talk about stimulating the economy this would pour billions into the system. Main street does not need Wall street, it is the other way around.
OUR ECONOMY IS DEAD.............
Never recoverred from 2008. Stock Market was lying indicator that we did.
Depression is among us. Goverment needs to accept that. Government needs to stop lying.
Politicians need to get the heck out of Washington. All Failures. All Bad Policy Making and Focus.
Hold on to your job at all costs.
Of course wall street will look for some other suckers to expand their scheme. Maybe they'll sucker states to put their tax receipts into it. Or some thing else. Then when they've sunk states tax payer money, they'll go after other meat.
Here's the thing, the stock market began to rise in 1982 when companies switched from pension plans to 401Ks. As baby boomers advanced in their careers and made more money they inveested heavily in 401K and IRA accounts. That same money that pushed the stocks up throughout the 80s, 90s and early aughts is now being withdrawn as baby boomers have begun to retire. From what I've seen of "retirement" villages, it looks like they intend to live it up as well since most retirees I know in their 60s and 70s are buying expensive homes, cars and going on 3-4 vacations a year unlike thier parents who after living throught the Great Depression lived miserly in retirement hoping to have enough to see them through and leave a little something to their heirs. Gen X and Gen Y don't have the numbers or salaries to replace what the boomers are taking out. As they sell, prices will only drop. Unless there is a magic group of investors that want to buy the massive amounts of stock being sold off we don't know about, you 'll never make any money in the market. It's simple supply and demand economics. The best we can hope for are small rallys and getting lucky on an individual company that does something innovative. Buckle in kids, it's going to be a rough ride.
i can't take it anymore, we need a new party, called the united party strictly bi partisan, taking the best both parties have to offer and working together for a better america.
No faith or confidence in the integrity of the market will keep people out now and more so in the future. The complicated Derivative Ponzi scheme that blew up in 08 wiped out trillions in the retirement funds. They just now got a law to prevent congressional insider trading. The ongoing investigation of the JPMorgan gaff will make investors even more wary of a corrupt and morally bankrupt market. From the S&L crisis of the 80's to every bubble that has burst since the market has been working hard to erode the confidence of a level playing field and integrity on Wall Street.
Your odds are actually better at the Casino's in Vegas than Wall Street right now.
A confidence problem and Wall Street is fighting all efforts to fix it through regulation. Stocks will be a dead term and investment if the current Wall Street practice is not regulated.
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