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Slow Death of Equities as More Investors Abandon Stocks in 2012


Parsad
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I love the last line of the article:

 

After the dot-com crash, it seemed as if “things would turn around. Now, I don't know,” Mr. Neitlich says. “The risks are bigger than before.”

 

Cheers!

 

That is a great line. I have a good friend who is a stock broker at one of the major brokerages. He isn't a big fish and has a stable of regular clients. Much of what this article says actually mirrors to some extent what he tells me. He has hundreds of clients and he says the vast majority want nothing to do with stocks. He says the financial crisis meltdown scared them to death but that the flash crash was the nail in the coffin. After that he said almost all his clients backed away from stocks. Most of his clients are typical retail clients of a full service brokerage (I.e older) and are content to roll their bonds.

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I can see how private investors might sit on the sidelines awhile longer but the pensions are going to be forced back into the game.  I am not an expert by any means, but the few pension plans I have seen are expecting returns in the 6-8% per year range.  These expectations run up against the reality of 30 year fed bonds yielding sub 3% and 10 years at sub 2%.  As they roll their bond portfolio over, the bond market is just not going to deliver for these pensions.  I just don't see what alternative they have to equities.

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I think this says a lot. Anyone who has significant exposure to long duration bonds at current interest rates is probably going to lose a lot of money. The article didn't specify, but hopefully people aren't purchasing these in any significant quantity.

 

Relative to interest rates, I think stocks are generally a good buy at current levels. An interesting thought, for anyone who cares about such things: the equity risk premium is currently at about 6% - near the highest in history. If interest rates were to move substantially higher, do you think that the equity risk premium would compress, or do you think the premium would remain the same?

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