Use access key #2 to skip to page content.

OleDrippy (41.94)

My Fear for the Future

Recs

3

March 12, 2009 – Comments (3) | RELATED TICKERS: SPY , EFA , EEM

I worry that there won't be enough money chasing stocks to make the market "rise". The problem is a stock only goes up on the secondary market if there is another guy willing to buy it for more, right? My concern is that the baby boomers with the vast majority of the wealth are going to be net sellers in the equity market. Could they possibly take the chance in exposing their retirement to stocks AGAIN after being burned twice in their peak earning years? My guess is no. As far as my fellow generation X-ers, I worry that many of them getting burned twice so early in their formative investing years will also be very reluctant to enter the stock market again. It happened with depression era folks and I could see it happening again. The Fed is effectively putting a gun to our collective heads saying "you WILL buy stocks" by keeping interest rates so absurdly low, so it is possible that we'll all just plug our noses and jump back into equities since there are few alternatives. I just fear the gig may be up and people are going to take their ball (money) and go home (bank, mattress, coffee can). 

Am I sniffing glue, or does this make sense?

3 Comments – Post Your Own

#1) On March 12, 2009 at 3:39 PM, Imperial1964 (95.84) wrote:

It makes some sense that average earnings multiples could compress back to what they were decades ago, but as a fellow gen Xer, I'm not particularly concerned.

For one thing, as a net stock buyer I prefer lower valuations.  I will still be putting money away for retirement for probably another couple of decades, so I really hope you are right.  If multiples are still low in my retirement, so what?  I will still profit from the earnings growth.  If multiples expand in my retirement, even better.  The only way I lose is if I buy in at high multiples (like in the late 90's) and in my retirement multiples compress.

For another thing, baby boomers on average do not have the kind of massive equity holdings you refer to.  See Mish's blog Boomers' Future Went Down The Drain for more details.  Many will be working well into their retirement, so I think the issue is a little overblown.

The 401k is the primary investment vehicle for most people's retirement.  What are your options?  Stocks, bonds, or opt out.  Nobody trusts Social Security will be around when they need it, so what are they gonna do??  People are gonna buy stocks.

And playing devil's advocate for a minute here, in this crisis people are realizing the necessity of savings.  Over the past 20 years people have relied on capital gains from their assets to accumulate wealth and prepare for retirement.  In the 90's it was capital gains on stocks.  Recently it was housing and commodities.  All you had to do is buy something, often with borrowed money, and wait to sell it to somebody else for more money--or just borrow against it.

Now people are realizing that sustainable wealth first has to come from money out of your paycheck, not borrowed from the bank.  And they are realizing that earning an actual payout is more dependable than capital gains.  If this is a cultural shift rather than a temporary phenomenon, Americans will build more savings and once this bear market is gone much of that will spill over into the stock market, particularly into safer dividend-paying stocks.

Partially I'm just playing devil's advocate here; I won't rule out a compression of earnings multiples.  But there is a fundamental reason why equity investment earns you the best returns over the long-term.  In 1979 Businessweek published this article "The Death of Equities" , which ironically marked the end of more than a decade of stagnation.

Report this comment
#2) On March 12, 2009 at 4:13 PM, TLStockPicks (93.63) wrote:

Stock's won't go out of fashion if the economy starts recovering... eventually, as earnings rise, even if common folk aren't trading anymore and prices are stagnant, once p/e's get "too" compressed, you'll see competitors, private equity firms, and other groups with money swoop in and take the company under their wing.  That will raise the prices of the stock, which will lead to, eventually, people coming back into the market.  Besides, I think people have surprisingly short-term memories... especially us Gen-Xers.

Report this comment
#3) On March 13, 2009 at 9:17 AM, OleDrippy (41.94) wrote:

@ Imperial1964 & TLStockPicks:

 Both valid points.. Even if there is a cultural shift out of equities, I can see that it probably won't last for more than a decade or so, which still puts buying stocks now in our generation's wheel-house.

 Thanks for the comments.

Report this comment

Featured Broker Partners