Lost Decade for Stocks?

The Wall Street Journal is usually a rah-rah booster for the investment industry. They are the very definition of conventional. They are certainly not contrarians, since the contrarians are (by definition) acting against conventional wisdom. So it’s a little shocking to see the WSJ finally waking up to and actually printing on the first page the ugly possibilities of cycles that experienced investors have already seen multiple times in our lives.


**This Could Be a Lost Decade for Stocks**
**U.S. shares could go nowhere for a while based on long-term valuations, or they could get it over with and crash**
**By Spencer Jakab, The Wall Street Journal, May 18, 2022**

**U.S. stocks could well bounce back from their awful start to the year. How they do in the longer run is another matter....**

**Pundits love to talk about earnings growth, but it hardly accounted for the excellent decade that ended last December....More important was the price that investors were willing to pay for a dollar of earnings. That went from a multiple of 13 times to 23.6 times over the decade ended Dec. 31, 2021. A multiple of 15 to 16 is about the historical average....**

**As sour as the mood has seemed lately, the S&P 500 would drop by another 45% or so if both margins and price/earnings multiples reverted to their long-run averages taking the benchmark back to a level it first crossed five years ago....** [end quote]

The charts show that the SPX entered a historic bubble in 2020 as the Federal Reserve and Congress pumped massive, historic monetary and fiscal stimulus into the economy.


The fiscal stimulus has not been renewed in 2022.

IF the Federal Reserve was to follow their current plan of going back to their historic practice of controlling inflation, maintaining a “neutral” fed funds rate and stopping their purchases of longer-dated Treasury and mortgage debt, thus allowing a free bond market as it was historically…

THEN the stock market would return to its historical levels. Either quickly (if the bubble pops) or slowly (with a long hiss).

That’s a very big IF.

Conventional central banking wisdom is that inflation can only be reversed if the fed funds rate is higher than the inflation rate. Currently, the inflation rate preferred by the Fed is 6.6%. (This is the Personal Consumption Expenditures Price Index generated by the Bureau of Economic Advisors.)

The Fed has finally stopped adding to its long-term bonds and it has begun to raise the fed funds rate.

The bond market doesn’t really, truly believe that the Fed will raise the fed funds rate that high, as shown by the short end of the Treasury yield curve. But the middle durations of the yield curve and the 5-Year, 5-Year Forward Inflation Expectation Rate also shows that the bond market thinks the Fed will be able to control inflation pretty soon.

I don’t see how both those things can be true. I think the bond market has its head in the sand. Yields are rising but they are not rising very fast or very high.


The stock market depends heavily on the behavior of the bond market. Bond yields directly affect businesses, especially ones that are heavily indebted and need to keep rolling over debt. (Such as many high-growth tech companies.) Rising bond yields also attract investors who never liked “TINA” (there is no alternative to stocks).

I’m not the only one who thinks the bond and stock markets are not yet responding to the true level of risk.


**Recession Looms, But Markets Haven’t Got the Message**
**For all the talk of recession, stocks and bonds aren’t reflecting much risk**
**By James Mackintosh, The Wall Street Journal, May 18, 2022**

**A new narrative of impending recession is quickly taking hold in the markets. Yet, look at the markets themselves and the story isn’t much reflected in asset prices, which are still beholden to the Federal Reserve. ...**

**Prices sensitive to monetary policy have fallen a lot. Really a lot. ...If the Fed turns yet more hawkish, these losses could intensify. But futures traders are already anticipating a lot of monetary tightening, and rate-sensitive stocks have responded with big falls, not only in the price but also in the valuation. ... But this isn’t like the post-dotcom recession, when industrials eventually lost a third of their value and consumer staples stocks rose....**

**The market seems not to be preparing for a deep recession, and perhaps not for a recession at all...The risk of recession has clearly risen, with the European economy heading down, China in a Covid panic, the Fed tightening fast and consumer confidence slumping....** [end quote]

The stock and bond markets both seem to think that the Fed will chicken out rather than cause a recession…or that they will quickly run back to monetary stimulus if a recession does start so everything will go back to the recent “normal” of Fed pumping.

Do they think that inflation will go away by itself? Controlling inflation is one of the Fed’s primary mandates, but supporting market valuations is not.

The stock and bond markets have huge risks at this time. They aren’t facing reality.



This Could Be a Lost Decade for Stocks
U.S. shares could go nowhere for a while based on long-term valuations, or they could get it over with and crash


I just heard the first of a series of Jeremy Grantham interview segments on Bubblevision (CNBC).

Grantham has been calling market crashes for decades. However, his description of the current market turmoil as “feeling like the crash of 2000” is accurate when measured against my own memory.

He also pointed out that the current housing bubble is a crisis in “affordability,” suggesting that we have reached a record gap between average home prices and affordability based on average income.

He described the unprecedented nature of inflation of equity prices on a global basis (rather than concentrated in only one or two markets), along with record prices of every major asset class. Grantham highlighted the fact that the price of fixed income assets (bonds) are at a 6,000 year high - that never in global economic history have the yields on bonds been manipulated to be as low as they have been during the last decade.

Grantham described how the prices of Japanese assets, including land, have never recovered since the 1989 bursting of the bubble, more than 30 years ago.

Under the “Taylor Rule,” Grantham says we would have to see interest rates of 9% to 10% to achieve neutral real rates.

In addition, the world now has a global shortage of labor, including in China, where there was a surplus of 500 million laborers 25 years ago. Therefore, wage inflation will be around for a long time going forward. When there is a labor shortage, profit margins must fall, meaning we will not see a repeat of the record profits of the last few years.

Commodities are also in short supply, along with labor. Accordingly, P/E ratios will inevitably adjust downward.

Grantham may be a permabear, but the circumstances and conditions he describes appear pretty darn close to the real world in which we live at the present moment.

No wonder the Dow Jones Industrial Average is down 1000 points right now.


Sorry, the Blair Witch will find a way to keep inflating the US stock market. You will pay high multiples, and you will LIKE it! :slight_smile:

I’m doing Roth conversions for the next 8 years. I’d prefer to do that at depressed prices.

Also, if you’re saving for retirement, lower prices can be a good thing.

The only sure winner is minimizing the “skim” of fees, trading costs and taxes. Stocks go up and down, but what you lose to investment expenses and taxes is gone forever.


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You think it’s a lost decade for stocks?

I think it’s a lost century for [most] crypto.


I think it’s a lost century for [most] crypto.

Sam Bankman-Fried saw his net worth halved from $22 Billion to $11 Billion. Somehow I think he’ll survive.

Billionaire Sam Bankman-Fried has lost half his net worth in 2022 but he says the crypto market isn’t going to zero and will recover with stocks: ‘Crypto markets have mostly stabilized’


I hope the lost decades gets me my 5% a year. I’d sit on Powell’s lap for 6%. For 7? There’s no telling what I’d do.

I hope the lost decades gets me my 5% a year. I’d sit on Powell’s lap for 6%. For 7? There’s no telling what I’d do.

Around 91-92, I got 8% on 12 month bank CDs. No lap dances required.


Around 91-92, I got 8% on 12 month bank CDs. No lap dances required.

I have a friend who went to college in 1980-83 (or maybe 79-82) and he took out college loans even though he didn’t need the money to pay for college. Instead he took the money and put it into double-digit yielding 5-year CDs. Then when they started maturing, he used the money to pay off his loans, and kept the copious interest. It was a great deal. His only regret was not putting the money into 30-year treasury bonds to collect double-digit interest for MUCH longer than 5 years.

I used my loans to pay for college.


His only regret was not putting the money into 30-year treasury bonds to collect double-digit interest for MUCH longer than 5 years.

When IRAs became generally available I started one in 1982 with Dean Witter (later part of Sears and then Morgan Stanley). That first year I used my $2000 contribution to buy a 30-year zero coupon bond. The interest rate was 14.5%


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