The Markets

Is the "cult of equity" dying?

Since 1912, stocks have returned on average 6.6 percent per year after inflation, according to Bill Gross, the legendary bond manager from PIMCO. Recently, Gross ruffled some feathers when he wrote that the historic 6.6 percent return "is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned." Histrionics aside, Gross makes a point that deserves elaboration.

Gross believes that, in the future, less of the country's wealth will be captured by capital (the financial markets) and more will flow to labor (as higher wages) and government (in the form of higher taxes). For the past 30 years, he said, capital markets were the big winner, as real labor wages and corporate taxes declined as a percentage of GDP. By his analysis, that will start to reverse with the capital markets being on the losing end.

Is Gross right?

Well, his chief critic, Wharton professor Jeremy Siegel, emphatically says no. In an August 2 Bloomberg interview, Siegel made the following three rebuttals to Gross:

1. 1.      The 6.6 percent real return was similar in the 19^th century in the U.S., too, so it's not just a 20^th century anomaly or "historical freak."
2. 2.      Other researchers have discovered non-U.S. equity markets with similar 6 to 7 percent real return averages over the past century, further supporting the idea that the U.S. is not an anomaly.
3. 3.      Often, when the media declares "equities are dead," that's a sign a bull market is just around the corner - remember the infamous August 1979 BusinessWeek "The Death of Equities" cover story? Three years later, stocks took off on one of the century's greatest secular bull markets.

So, who's right, Gross or Siegel?

It turns out they both could be right. The key is your timeframe. Since markets fluctuate, we'll likely see periods when the market delivers more than a 6.6 percent real return and other times when it's less. However, simply buying and holding on for dear life hoping Gross is wrong probably isn't the best strategy. Rather, rigorous analysis of all the investment opportunities and careful portfolio tweaking could be the solution.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

COULD THE THREE WORDS "PRIME CHILDBEARING AGE" FORESHADOW the next big up move in the stock market? We're all familiar with the "Baby Boom" generation and the massive impact they've had on society. But, less noticed is their offspring, dubbed the "Echo Boom." Nearly 80 million strong, "they will be become the next dominant generation of Americans," according to CBS News.

Today, the number of women in "prime childbearing age" is surging and is at an all-time high. While the recent recession and lingering weak economic environment caused many Echo Boomers to postpone childbirth, this could change quickly if the economy picks up speed.

If this potential pent-up demand for babies actually materializes, we could see a spike in births that helps drive consumer spending, corporate profits, and the stock market higher. This potential demographic trend is one reason to be optimistic about America's economic future.

Weekly Focus - Think About It...

Making the decision to have a child - it is momentous. It is to decide forever to have your heart go walking around outside your body.

--Elizabeth Stone

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