Learning From History

The only thing we learn from history is that we learn nothing from history. — Friedrich Hegel

Bloomberg had an interesting article on how much investors currently hate stocks.  Consider, for example, the following excerpts:

[The S&P 500] traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years…

Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington.

Valuations have fallen even as the S&P 500 rallied 21 percent since the end of 2009 because profits increased five times as fast. The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009.

That’s the backdrop.  Profits have increased five times as fast as the market has gone up, but money is still flowing out of US stocks!  What happened last time sentiment was so negative?

The past decade parallels the span between Dec. 31, 1964, and the end of 1981, when the Dow added less than 1 point after surging interest rates diminished the appeal of equities. While the 115-year-old stock gauge ended the period at 875, it ranged between 577.60 and 1,051.70.

After stalling for 17 years, the U.S. stock market staged the biggest bull market in history through early 2000, driving the Dow up 15-fold from its low point in 1982.

The retreat leaves stocks in position to rally because so many bearish investors can be lured back to equities and the market is cheap, according to Scott Minerd, the chief investment officer of Santa Monica, California-based Guggenheim Partners LLC, which oversees more than $125 billion.

“Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call,” he said. “Even if we had a 50 percent increase in multiples, stocks would still be cheap.”

History is useful principally because we can go back and check what happened last time.  The caveat is that things are never exactly like last time.  There’s also no requirement that things operate on the same timetable as before.  What does seem apparent, however, is that there is a bigger margin of safety built into the valuations of many stocks than there was even a few years ago.  I wouldn’t even hazard a guess as to when the market might take off, but if it does, relative strength will probably be a pretty good way to identify the leadership.

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