Recently the press, notably magazine covers, have featured stories stating that we are on the threshold of a multi-year market boom, one that will rival the one that occurred between 1980 and 2000.
Magazine cover stories about the economy and the stock market have an uncanny record of being completely wrong. To take just one example, Business Week, on its magazine cover story on Aug. 13, 1979, proclaimed “The Death of Equities,” that the stock market no longer was of any interest and would be in a long-tern decline.
Nevertheless, within four months the stock market began a fantastic climb that lasted for nearly 30 years, rivalling the crazy stock market boom in the 1920s.
Time and time again magazine articles and cover stories on the economy and the stock market are totally erroneous. Hence, one should view cautiously the Feb. 18, 2013 cover story in Maclean’s stating boldly that we’re in the midst of one of the biggest bull runs (in the stock market) in history.
The leading article listed all the optimistic factors that would entail this tremendous advance in North American stock markets. Hence autos will boom because the average age of cars on the road is about eleven years old.
Ignored are the facts that cars are more durable than heretofore and that most cars are purchased with interest-free loans for five years. Then too, it was stated that corporate balance sheets are flush with cash. Still, most pension funds are woefully underfunded. Mentioned too was the housing sector that may continue its resurgence.
One by one this argument should be refuted.
The present boom in housing has been fueled by rock-bottom interest rates. That has tempted many to buy a house because carrying charges are affordable.
What happens when interest rates inevitably rise? In the 1980s interest rates fell precipitously. Too many purchases have been led by speculators seeking a safe haven. Condos in Toronto and Vancouver are being overbuilt, particularly in view of declining family formation.
The ratio of stock prices to earning is way above average, about 27 times earnings, compared to about eight in 1980 and approximately 12 in 1929.
The theory that a group rotation out of bonds and into stock will bolster the stock market defies logic. Someone has to buy those bonds. Investors remain wary of the stock market because of the volatility in recent years.
The Maclean’s thesis seems to disregard history and, therefore, seems to be just nonsense.
It must be acknowledged that momentum and psychology are important to the stock market. Notwithstanding that, the fundamental should cause a great deal of concern.