Is it time to buy Equities? #1

If you've been following the financial news over the last couple of months chances are that you are really worried about the global economy. And rightfully so. But given the current levels (S&P500 at 920 as I am writing this) the question is when is it time to get back into Equities.

To clarify my general position: I do believe that we'll see a pretty nasty recession both in the US and in Europe and that the lack of easily available funding will make this downturn even harder for a lot of companies. And the consumer (especially in the US) this time around will have to react with spending cuts. No house price increase to pull money out of, no easy bank loans to keep spending like it's 1999. We have just started to see the impact on the real economy.

Nevertheless I am getting more and more interested in buying for the long term. Why?

Long term growth: the S&P has retreated to 1997 levels which means we have had a decade of 0% growth in equities. Nothing entirely new (look at '27 to '49 or '68 to '80 for even longer periods) and the argument might be that we left the long upwards trend in '95 and went into massively overvalued territory. But even if that was the case then the Tech bubble correction brought us back down to more "normal" levels in a historic context and the recent sell off has pushed as far below those. (see chart - S&P '28 to '08). Not a guarantee that things will get back immediately but if we've seen no returns over 10 years and the long term historic growth for US equities is +10% then we are bound to at least get back to that trend at some stage unless fundamentals have changed dramatically (which i don't believe - more about that below)




Productivity gains: I would argue that the last 10 years have witnessed an increase in average productivity and efficiency unseen since maybe the introduction of the car. The impact of the mobile phone and the Internet, overestimated in the short term in the Tech bubble years, is in my view under appreciated for the long term at the moment. No way have close to zero communication costs, super fast time to market, immediate feedback, more transparent consumer behaviour than ever before etc resulted in zero percent growth in the underlying economy over the last 10 years or so. And going forward with more and more "digitally educated" consumers growing up I cannot see productivity growth declining. (to clarify - i am not talking about a "new paradigm" type "we'll all buy 10 PCs" kind of growth but simply a period -like many before- of higher than average productivity growth)

to be continued (next time: Commodity prices as a buffer, Bad debt, Financial crisis, Lessons of l-term investing)