Chapter 4: The Long-Term Case for Equities
The Long-term Case for Equities
MR. INSANA: And Candace, one could argue and I know you folks are, that we're in the early stages of a secular or a long-term bull market and a lot of people have suggested that from 1998 until 2008, we were in a long-term bear market for the average stock. It really went nowhere. But people are loathe to believe this--that we're in the early stages of what could be a 10 or 20-year bull market in stocks like we saw from the early '80s into the late '90s. Why would you make that argument today?
MS. BROWNING: Well, what we've been calling it is the great rotation and it basically is a great rotation out of fixed income, which people piled into right after 2008, so a rotation out of fixed income and into equity.
The “Great Rotation” Story
And again, it's a very simple story. It has to do with the fact that the macro backdrop is improving, that the job market's improving, the housing market's improving. So these big sort of shocks that are just slowly fading away which gives people the prospect of higher earnings growth going forward, combined with the fact that equities are relatively attractive to the bond market. And therefore, I think you will see and continue to see this great rotation.
MR. INSANA: People, though, are still worried that somehow we're going to have one of these pullbacks that could be short, sharp and scary, but suggestive of too much risk in equities. How do they deal with corrections in a longer term bull market?
MS. BROWNING: Well, undoubtedly we will have a correction at some point over the next twelve months. Inevitably, it will happen, but again, I think it goes back to looking at the long-term trends and that's the way you have to look at your portfolio. And it's difficult for people because we're saying look at the long-term trends, focus on the long-term and yet we're also saying there's a great transformation out there and you need to change, and putting those two together is really hard for people.
See our A Transforming World report for
more insights into these great market shifts.
And there again, I think embracing the fact that the portfolio that you have today versus what you had four years ago is not correct and talking to your financial advisor to get some comfort that when we go through a correction, that you're doing the right thing.
MR. WOLFE: You know, in a simple sense, a way to think about it is to talk about our return to normal in the portfolio. If you've gone from a defensive post-traumatic stress type of environment, a return to normal will feel a little bit like a return to being more diversified and the big gain that an investor gets out of that is flexibility to rebalance, so when there is a correction, okay, I have bonds that are liquid, useful, can sell some of those to buy the things that will help me along my long-term path.
MR. HYZY: And ultimately speaking, if the movement from fixed income into equity, the great rotation is very sharp, then it becomes damaging. But the likelihood of that is extremely low. What we're seeing right now is more cash, high cash going into equities and they're skipping over fixed income which makes a lot of sense.
MR. WOLFE: Certainly the risk around bonds rising and interest rates, there's pretty damaging to fixed income portfolios. But the good news is many clients hold bonds that don't mature out in 20 or 30 years. They're being more careful around high yield and not just chasing yield.
In a rising interest rate environment,
consider diversifying sources of income
And we've been really advising them to think about diversifying the sources of income in an environment like this, so look to some of the equity stories, look at income outside the US, and that type of diversification of income where somebody may seek that is a time- honored principle around modern portfolio theory that we think will help clients manage those risks.
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Our panel looks at what the “Great Rotation” into equities means for investors, and how a long-term view can help them manage risk.
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