Business Week's "The
Death of Equities" Revisited
I managed to locate the legendary cover story which was first published
in Business Week magazine's August 13th, 1979 issue. The article offers
a fascinating insight into the extremely bearish perceptions of an
ordinarily upbeat publication. The article was published at a time when
the Dow was languishing at 875 and had been trading in a see-saw fashion
ever since topping out 6 1/2 years earlier in January of 1973. Inflation
was a persistent nag on the economy and the Federal Reserve and US
fiscal policies were held in low regard.
The reason that I am presenting excerpts and a discussion on this 18
year old article is to exemplify how far sentiment has shifted since
the summer of 1979. Currently, things (the economy, stock appreciation,
government spending, consumer confidence, etc.) couldn't be better and
there aren't any expectations that things will get worse anytime soon.
In the "Death of Equities" article, Business Week found it hard for the
same things to be any worse and there weren't any expectations for them
to get better anytime soon.
There are a lot of interesting viewpoints the article, and I want to
try to include most of them along with my own comments. The synopsis of
the article was:
MONEY & BANKING
The death of equities
The masses long ago switched from stocks to investments having higher
yields and more protection from inflation. Now the pension funds--the
market's last hope--have won permission to quit stocks and bonds for
real estate, futures, gold, and even diamonds. The death of equities
looks like an almost permanent condition--reversable someday, but not
Wall Street looks beyond stocks
Moving into options, futures, buying into insurance
Cover: Photograph of a downed paper airplane fashioned from a stock
The sub-caption for the cover of the magazine was "How inflation is
destroying the stock market." The downed paper (stock certificate)
airplane in the picture was actually surrounded by the crumpled remains
of other "crashed" paper airplanes. Here is the first excerpt:
...Pension fund money can now go not only into listed stocks and
high-grade bonds but also into shares of small companies, real estate,
commodity futures, and even into gold and diamonds...
To millions of people, that ruling could mean a higher return on their
pension fund assets after years in which inflation has nibbled away at
the return from mere traditional investments. On another level, the
Labor Dept. ruling [for pension funds] is just one more in a nearly
endless string of unhealthy things that have happened to the stock
market over the past decade.
Wow, diamonds as an investment over stocks. Real estate was a good move,
but gold hit its peak in 1980 before beginning its long bear market which
is still in place today. Here is another excerpt:
Only the elderly remain
At least 7 million shareholders have defected from the stock market
since 1970, leaving equities more than ever the province of giant
institutional investors. And now the institutions have been given the
go-ahead to shift more of their money from stocks--and bonds--into
other investments. If the institutions, who control the bulk of the
nation's wealth, now withdraw billions from both the stock and bond
markets, the implications for the U.S. economy could not be worse
worse. Says Robert S. Salomon Jr., a general partner in Salomon Bros.:
"We are running the risk of immobilizing a substantial portion of the
world's wealth in someone's stamp collection."
Until now, the flight of institutional money from the financial markets
has been merely a trickle. But it could turn into a torrent if this
year's 60% increase in oil prices touches off a deep recession while
pushing inflation sky-high. As it is, the nation's financial markets
and its capital flows have been grossly distorted by 13 years of
inflation. Before inflation took hold in the late 1960s, the total
return on stocks had averaged 9% a year for more than 40 years, while
AAA bonds--infinitely safer--rarely paid more than 4%. Today the
situation has reversed, with bonds yielding up to 11% and stocks
averaging a return of less than 3% throughout the decade.
Amazingly, the article seems to be suggesting that stocks are no longer
a better investment than bonds. This of course, is the exact opposite
of the current mantra which states that stocks always outperform other
investment vehicles...especially bonds. The next excerpt is very
suggestive of a capitulation to the idea that stocks always go up:
Further, this "death of equity" can no longer be seen as something a
stock market rally--however strong--will check. It has persisted for
more than 10 years through market rallies, business cycles, recession,
recoveries, and booms.
In today's market, we are constantly bombarded on how Baby Boomers will
keep it propped up as they save for retirement. The demographic
argument was also used by Business Week's pessimistic article to describe
how it would hurt stock prices:
The problem is not merely that there are 7 million fewer shareholders
than there were in 1970. Younger investors [Baby Boomers?], in
particular, are avoiding stocks. Between 1970 and 1975, the number of
investors declined in every age group but one: individuals 65 and
older. While the number of investors under 65 dropped by about 25%,
the number of investors over 65 jumped by more than 30%. Only the
elderly who have not understood the changes in the nation's financial
markets, or who are unable to adjust to them, are sticking with
I guess it was a good thing that the elderly didn't understand the changes
in the nation's financial markets, because the Dow bottomed three years
later before embarking on its current Great Bull Run. The next excerpt
argues that we have entered a "new era" of stock investing and the "old
rules no longer apply." Sounds like what we hear today, except this time,
stocks are expected to go up.
Even if the economic climate could be made right again for equity
investment, it would take another massive promotional campaign to
bring people back into the market. Yet the range of investment
opportunities is so much wider now than in the 1950s that it is
unlikely that the experience of two decades ago [the 1950s], when the
number of equity investors increased by 250% in 15 years, could be
repeated. Nor is it likely that Wall Street would ever again launch
such a promotional campaign. The end of fixed stock market
commissions has thinned the ranks of firms that sell stocks and
reduced the profit from selling stocks for virtually all firms. Wall
Street has learned that there are more profitable things besides
stocks to sell, among them options, futures, and real estate, that it
did not have in the 1950s. For better or for worse, then, the U.S.
economy probably has to regard the death of equities as a
near-permanent condition--reversible some day, but not soon.
Says Alan B. Coleman, dean of Southern Methodist University's business
school: "We have entered a new financial age. The old rules no longer
The one rule whose demise did the stock market in could be summed up
thus: By buying stocks, investors could beat inflation. Stocks were a
reasonable hedge when inflation was low. But they proved helpless
against this awesome inflation of the past decade. "People no longer
think of stocks as an inflation hedge, and based on experience, that's
a reasonable conclusion for them to have reached," says Richard Cohn,
an associate professor of finance at the University of Illinois.
Indeed, since 1968, according to a study by Salomon of Salomon Bros.,
stocks have appreciated by a disappointing compound annual rate of
3.1%, while the consumer price index has surged by 6.5%. By contrast,
gold grew by an incredible 19.4%, diamonds by 11.8%, and single-family
housing by 9.6%.
Diamonds? Apparently, diamonds were seen as a viable investment at the
time but you certainly don't hear about them as such these days. In
fact, hard assets such as gold and real estate were seen as less
speculative than stocks:
"Given the type of consistent high-level inflation we've been
experiencing, the stock market represents speculation, and some
tangible assets represent the opposite," says Edward R. McMillan,
chief economist for Seattle's Rainier National Bank.
Today, one of the strongest proponents of gold investing is Alaska
Governor Jay Hammond. He plans to resubmit a bill to the legislature
early next year to lift a law, passed in the early 1960s, that
prevents the state's public employee and teachers retirement funds
from investing in gold, foreign securities, or real estate. At least
three other states are also interested in tangibles for their
retirement funds. "The statute was fine for the 1960s, but
unfortunately we're not living under those same economic conditions,"
says Alaska's deputy treasury commissioner, Peter Bushre. "We're
living under double-digit inflation, huge balance-of-trade deficits,
and a serious energy problem. The current action in both the bond
market and equity market bear [pun?] me out."
At the time, it was difficult for people to imagine that inflation would
someday be much lower. Instead of looking towards possibly more benign
economic conditions in the future, investment decisions were being based
on the assumption that the current high inflation would extend
indefinitely. Gold currently traded at about $300 an ounce at the time
and although it did spike up to $800 the following year, it now trading
at under $350 an ounce for a 17% gain over an 18 year period. The Dow
has gained 740% since that time. The next excerpt discusses the death
of the "nifty fifty" or the large cap, "one decision" stocks:
Eccentric money markets
...For investors, however, low stock prices remain a disincentive to
buy [so much for buying on the dips]. The only stocks that have done
well recently have been hyper-growth stocks such as energy-related,
gambling, high-technology, or fast-growing small companies. A decade
ago, by contrast, the entire equity market was perceived as an
inflation hedge. Then, in the early 1970s, large growth stocks,
especially the so-called "nifty fifty" were in vogue as inflation
fighters--until the 1974 recession dealt them a blow from which they
have yet to recover.
Unfortunately, hyper-growth stocks are not big enough to attract big
institutional money. Private pension funds, for example which control
some $300 billion in assets and are the single most important factor
in the financial markets, put more than 120% of their new cash into
equities in the late 1960s [a sell signal?]. To do so, they even sold
bonds to raise money to buy stocks. Today the amount of new pension
money flowing into equities is a minuscule 13% as the funds have built
up their cash portions or stuffed their portfolios with short-term
securities paying high rates.
In short, the financial markets are so eccentric that for more than 10
years the largest returns have come from taking the fewest risks.
Indeed by constantly rolling over short-term paper, investors have
beaten returns on stocks and bonds...
Equity mutual funds (which now total over $1 trillion in assets) were not
always the favorites of investors. The next excerpt shows why I didn't
find a single mutual fund ad extolling the virtues of investing in
...In fact, the only reason the mutual fund industry has been able to
survive the death of equities is the dramatic success of such funds,
which invest in T-bills, bank CDs, and other short-term paper. Mutual
fund assets now total some $65 billion, and of this amount, some $22
billion represents assets of money-market funds. And whereas stocks
once made up 80% of mutual fund assets, today that figure has slumped
to less than 50%.
Clearly, money market funds--most of which allow investors to write
checks on their accounts--will prosper until interest rates begin to
ease. But even when rates do fall, the money will not flow back into
the stock market from which it came. Indeed, putting life back into
the U.S. equity market will be a long and difficult process.
Unlike today, U.S. businesses and fiscal policies were held in very
low regard compared to those of other countries:
Other foreign stock markets such as those in Toronto, Hong Kong, and
London have been doing as well or better [than the U.S. market]. One
reason is the influx of U.S. money that a decade ago would have flowed
into Wall Street. Atlantic Richfield Co., for one, will invest in
foreign stocks for the first time this year. The company will take 3%
of its U.S. equity allocation and put it into shares of companies
based in Japan, Germany, Britain, and France. "The attraction is that
these economies are growing at a rate equal to or better than our own
and have business cycles different from ours," says Howard H.
Ockelmann, the big oil company's investment officer.
Undoubtedly, another reason for the surge of investment in foreign
stocks is the negative attitude toward business in the U.S. "The
Japanese do everything they can to make their strongest and most
competitive companies do well. Americans attack their largest and
most successful companies," says Andrew J. Hutchings, an equity
manager for Royal Trust Co. in Toronto.
The next few excerpts were from a companion article stating how even Wall
Street was abandoning equities and were in a fight to stay alive:
Wall Street looks beyond stocks
As investors have fled equities, so Wall Street, to survive, has fled
them, too. Indeed, the flight from equities, combined with the
freeing of fixed brokerage commission rates on May 1, 1975, has
changed the very nature of the securities industry. And while the
industry has markedly fewer firms than it had, and thus should be
sounder financially, the truth is that Wall Street's future still is
very much in doubt. "Anybody who thinks that it will be easy sailing
for Wall Street during the 1980s is dead wrong," says James Balog,
senior executive vice-president of Drexel Burnham Lambert Inc. in New
York. "There still are many problems that we must deal with."
...securities firms will continue to diversify away from equities, all
the while hoping that the stock market will somehow regain some of its
luster and make their task somewhat easier. At the same time,
executives of those firms will be devising and implementing new
long-term strategies, not really knowing whether they or their
organizations will remain in the business long enough to reap the
benefits from some of these plans.
The final excerpt from the end of the article makes the conclusion that
stocks are no longer the best long-term investment alternative for
Whatever caused it, the institutionalization of inflation--along with
structural changes in the communications and psychology--have killed
the U.S. equity market for millions of investors. "We are all
thinking shorter term than our fathers and grandfathers did," says
Manuel Alvarez de Toledo of Shearson Loeb Rhoades Inc.'s Hong Kong
Today, the old attitude of buying solid stocks as a cornerstone for
one's life savings and retirement has simply disappeared. Says a
young U.S. executive: "Have you been to an American stockholders'
meeting lately? They're all old fogies. The stock market is just not
where the action's at."
The Dow's final bottom occurred just three years later in 1982 after
reaching a peak of 1024 in early 1981 (an appreciation of 17% in the two
years AFTER the "Death of Equities" article). In August of 1982, the Dow
hit 776 before embarking on its greatest bull run that has extended to the
present after almost 15 years.
Contrary to the article and its very pessimistic opinions and observations,
the summer of 1979 would have a good time to invest in equities. It is
very interesting that at a time when investors needed to hear that stocks
were the best long term investment, Business Week was not up to the
task of convincing them with an optimistic viewpoint. The article
concentrated on the negative--positive developments were not anticipated.
The article didn't even bother with any bullish opinions and the article
was filled to the brim with pessimistic quotes from leading analysts.
At present, we have come full circle. In the past year or so, Business
Week has become the eternal optimist as opposed to the eternal pessimist
as detailed in their "The Death of Equities" cover story. Two recent
Business Week cover stories come to mind: "Our Love Affair with Stocks"
(June 3, 1996), and the recent "The New Business Cycle" (March 31,
1997). These upbeat articles are almost completely diametrically opposed
from the angst filled article written near the bottom of the secular bear
market which lasted from 1966 to 1982.
Business Week wasn't the only publication to print bearish stock market
articles anymore than they are the only ones to print bullish ones
presently. My main purpose of this analysis of an 18 year old article
is to show how views become entrenched and foisted upon the public as if
they will continue indefinitely. In the case of "The Death of Equities,"
Business Week felt that the ills that had hampered the stock market's
performance for the past decade would continue into the future. The
latest cover stories from the magazine indicate that the current stock
market nirvana of the past 15 years will continue into the future. Time
will tell if these optimistic cover stories will point to a secular
market top as "The Death of Equities" cover story pointed to a secular
Week -- 06/03/96: Our love affair with stocks
Week -- 05/19/97: How long can this last?
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