When Barron’s Magazine trumpeted “Dow 15,000” on the cover of its February 13 issue, it frightened some traders and investors because Barron’s has a reputation akin to the Sports Illustrated cover jinx. In fairness to Barron’s, the article is about the case for a bull market that is being made by a few mavens of the industry. The article actual predicts the Dow will hit 15,000 if not 17,000 in two years. The case for a bull market is not based on fundamentals of a strong economy and great earnings, although that is implied. The case is based primarily on the reverse of the age-old wisdom: What goes up must come down. The forecasters flip this and say: What goes down must go up. According to the seers, because stocks have underperformed for so long, surely it’s time for equities to rise.
Even with the year-end 2011 rally, the past five-year and 10-year comparison cycles were in the lowest quartile in stock market history. Basically, stocks have done nothing for more than ten years. The article goes on to say investors are now under-invested in stocks and should be piling in for the inevitable bounce. But the forecasters forgot one possibility – the world has changed. Investors have suffered through the 2000 tech bubble collapse, the 2008-2009 stock market meltdowns, the 2010 and 2011 near-death experiences in the market, and the meltdown in home equity. People just aren’t as confident that we’re due for a rebound. Certainly most people near or in retirement are in survival mode, preserving the remaining principal after so much destruction.
The pundits point out how investors are under-invested in stocks. Maybe so, maybe not. A lot of investors were scared out of stocks at the worst times, and they simply have less money for stocks. They cannot afford to risk anymore shocks to the system. According to data about individual investor flows, bond fund inflows relative to pure stock funds is now up cumulatively since 2001 at a nine-to-one pace in favor of bonds. The shift was dramatic beginning in 2008. The world has changed. People have changed. This is a secular shift, not a cyclical shift. Stocks might do very well over the next two years, but the investing public will not suddenly shift back into stocks. The repeated beatings taken by investors have left deep scars. This is a fundamental change. How long will it last? No one knows. Gold, silver, and oil suffered meltdowns in the early 1980s, and it was 20 years later before the new bull market in commodities began. After 22 years, the Japanese stock market is still down roughly 75% from its peak. I’m sure a lot of people in those markets once thought what goes down must go up, too.
The same market mavens who said stocks are due to rally have also said rates are certain to rise because they have been so low for so long. Despite what Barron’s experts and other Wall Streeters say, there is no law of nature or finance that says what goes down must go up. And if rates do stay low for years to come, as I expect, credit unions can benefit. Yes, low rates will hurt investment portfolio earnings, but there will still be some spread. However, credit unions can benefit even more by developing deeper relationships with members. Members with money won’t be eager to rate shop for CDs, and they won’t be looking for the first opening to step into stocks. The secret to success is to stay connected with members and deepen the relationships. In that, credit unions have a huge advantage over banks. For those of you who listened to Callahan’s year-end Trendwatch webcast, you saw that in the numbers. Credit unions grew profits during last year’s low-rate environment, but more importantly, they grew market share. A low-rate environment has its challenges, but credit unions have the upper-hand.
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