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Reports of ‘Death of Equities’ Greatly Exaggerated: DFA

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Dimensional Fund Advisors’ vice president Weston Wellington found something awfully familiar about a recent article in the Financial Times. Although unremarkable at first glance, as it was one of dozens of such pieces about a loss of investor interest in equities, its tone and key phrases jogged his memory.

“We dug out our copy of the ‘Death of Equities’ article appearing in BusinessWeek on August 13, 1979, to have a fresh look,” he writes. “Similar?”

Listing key paragraphs of each article, he quips, “You be the judge.” A sampling:

1) BusinessWeek, 1979:  “This ‘death of equity’ can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms.” 

Financial Times, 2012:  “Stocks have not been so far out of favor for half a century. Many declare the ‘cult of the equity’ dead.”

2) BusinessWeek, 1979:  “Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes.” 

Financial Times, 2012:  “The pressure to cut equity exposure is being felt across the savings industry. … In the US, inflows to bond funds have exceeded equity inflows every year since 2007, with outright net redemptions from equity funds in each of the past five years.”

3) BusinessWeek, 1979:  “Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack.” 

Financial Times, 2012:  “With equity financing expensive, many companies are opting to raise debt instead, or to retire equity.”

After a period of market advance and retreat between 1979 and 1982, August 13 of the latter year “marked the first day of what would turn out to be one of the longest and strongest bull markets in U.S. history.”

His most damning piece of evidence against the death of equities pronouncement and subsequent follow-up is a simple look at S&P 500 growth over the next 30 years.

By the first anniversary of the beginning of the equity bull market, the S&P returned 58.3%; on the fifth anniversary, 224.%; on the 10th anniversary 307.9%; the 20th anniversary, 782.4% and, on the 30th anniversary (coincidentially, 2012), 1,225.9% as of June 19.

He adds that one of the authors of the FT article, John Authers, is familiar with the BusinessWeek article and “wary of making pronouncements that might look equally foolish ten or twenty years hence.”

In a follow-up article appearing several days after the first, Wellington notes, Authers appealed for “divine assistance” in his forecasting effort: “O Lord, save me from becoming a contrarian indicator.”

“The notion that risk and return are related is so simple and so widely acknowledged that it hardly seems worth arguing about,” Wellington concludes. “But these articles (and others of their ilk) offer compelling evidence that applying this principle year in and year out is a challenge that few investors can meet, and explains why so many fail to achieve all the returns that markets have to offer.”

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