Markets in Transition
Jeremy Siegel and Jeremy Schwartz write in the Wall Street Journal today that common stocks are attractive and bonds are not. With regard to bonds, this appears to be a blinding glimpse of the obvious, with interest rates at generational lows. But, we tend to use bonds for their capital preservation characteristics as opposed to just viewing them as income generators. Are common stocks attractive investments though? Siegel and Schwartz have some poignant comments relating to a hypersensitivity on the part of US investors to mortgage defaults, suggesting that capital markets have already factored in a “worst-case scenario” and the surprise might be fewer defaults than anticipated. Many investors are understandably unreceptive to the notion of stocks being attractive investments going forward given the abysmal returns of the past decade. Emotions aside though, could common stocks be entering the transition phase from secular bear market to secular bull market? It seems conceivable. As we pointed out in our blog last week, there appears to be a growing, and near universal recognition that large, underfunded public sector employment liabilities are problematic. If left unchecked, they can and will absorb the capital needed for future economic investment and prosperity. We believe positive modifications will be forthcoming in this area, as well as in US defense spending. Both could materially alter the scope of fiscal policy, with positive repercussions for long term, common stock investments. What do you think? Competing viewpoints are welcomed.