Citi: 'Cult of Equity' is over as bonds beat stocks
Citi: 'Cult of Equity' is over as bonds beat stocks
The stock market, writes Citigroup's global equity strategist Robert Buckland and his team, "is an emotive issue... Demand creates its own supply."
So when he tells clients, in a report last week, that "$100 invested in U.S. equities in 1950 would have been worth $58,380 at the end of 1999, versus $1,768 in bonds," he's talking about an unusual rally that gave birth to a self-sustaining industry -- a religion -- a multi-national "cult of the equity."
But "since the end of 1999, global equities have returned -29%, compared to a +80% return from government bonds." And these "dreadful returns" are finally "putting investors off equities." That includes pension funds, which have to raise cash and protect principal as workers age, and 401-k and other non-guaranteed retirement plans, which "may not be willing to tolerate volatile equity returns."
If investors keep losing faith in stocks, stock prices and dividend yields could revert to their pre-1950s relationship with bond prices and yields -- which means the S&P 500 could drop "another 40% below current levels...This suggests that the place where the best value is to be found right now is corporate bonds."
Buckland is based in London. He acknowledged his U.S. strategy associate, Tobias Lefkowich, says "it's strange to be talking about the death of the equity cult at a time when other asset classes are doing very badly. Maybe we should be looking at the death of (the) alternative asset cult instead."
Citi's conculsion: "We are not saying that investors should dump equities at the bottom of the worst bear market in 80 years. It's too late to do that." It's even likely that stocks will start to rise before the rest of the ecomony. But there will still be "plenty of sellers," even when prices do start to move back up.
