Not quite 30 glorious years
Posted on July 8, 2009 by Richard Beddard
Filed Under Markets |
In history:
30 28 25 23 glorious years
The last 30 years were momentous for investors but what did they mean to you? I’m writing the story of the stockmarket in the words of the private investors who bought and sold shares since the Thatcher years. The article will appear in Money Observer later this year, when the old lady (that’s the mag., not Mrs T, and definitely not MO’s editor) celebrates her 30th anniversary. If these events rekindle memories, please leave a comment, or email me, richard.beddard@iii.co.uk.
1979 is a famous, some would say infamous, year in our political history, the year Margaret Thatcher became prime minister, but it’s impossible to assess the last thirty years, without remembering what went before.
In his history, John Littlewood described the 15 years from 1964 to 1979 as:
…the most consistently negative post-war period for the stock market investor, and many would say the same 15 years form the most dismal of any for the state of the economy and the failure of political history.
The purpose of owning shares, he said, is to participate in the growth of the economy and to protect against inflation, but shares failed to match inflation, let alone growth. Despite bull markets, as well as bear markets, between 1964 and 1979 shares lost a third of their real value as prices rose seven-fold. Investors in bonds did far, far worse.
The backdrop of trade union power, failed incomes policies, dividend controls, profits squeezed by polices that were better at controlling prices than wages, the Winter of Discontent, and three-day weeks, is a distant memory now.
But, after thirty glorious years for investors, or perhaps 23 if you take out the down years 1979, 1990, 1994, 2000, 2001, 2002, and 2008, some experts like CLSA’s Russell Napier are thinking that the next decade will look more like the sickly seventies than the eighties or nineties.
If that’s so, naturally bullish investors will need to feed off memories of the 1980’s and 1990’s, while pondering to what extent they’re to blame for the mess we’re in now…
…In 1979 the stockmarket had been rising in anticipation of a Conservative victory but, after it hit a new high the day after the election on 3 May, it fell 30% over the remainder of the year.
Mrs Thatcher had promised trade union reform, lower taxation, reduced government borrowing and the denationalisation of aerospace and shipbuilding. She quickly added the abolition of price, dividend and exchange controls and a wholesale switch to the free market. In his first budget, chancellor Sir Geoffrey Howe cut government spending and raised interest rates, attacking inflation with a monetarist straight jacket.
With inflation and interest rates soaring, investors began to appreciate the magnitude of the task ahead. Littlewood quotes a market report by Rowe & Pitman from July 1979 to illustrate their dilemma:
In explorer’s language the valley threatens to be rather deeper than expected but the light across it is that much brighter.
And four months later, on the day interest rates peaked at 17%, the stockmarket embarked on a record breaking bull run that lasted until 16 July 1987 when it was punctuated only briefly by the bear market either side of Black Monday. In seven years eight months, the FTSE All Share index rose from 219.85 to 1,238.57, or 463%.
Apart from Black Monday and a bear market sparked by the onset of recession in 1990, the only other major setback before 2000 occurred in 1998 when Russia devalued and restructured its debt and Long Term Capital Management, a hedge fund, collapsed, threatening the financial system. Governments on both sides of the Atlantic responded to the panic, just as they had after Black Monday, by cutting interest rates.
The FTSE All Share rose to a peak of 3,265 in September 2000, and despite the technology bust it surmounted that peak in the summer of 2007 before falling to its current level, 2,140. The first decade of the twentieth century looks like being far less glorious, in stockmarket terms, than the two decades before.
Along the way, we’ve experienced riots, national strikes, inflation over 20% and by one measure below 0%, the privatisation of a huge swathe of nationalised industry, the spectacular growth of companies like Vodafone and WPP and the catastrophic collapse of Polly Peck and Parkland, the rise and fall of 80’s icons Body Shop, Sock Shop, Tie Rack and Laura Ashley, scandal at Guinness and Barings, war in the Falkland Islands, Iraq and Afghanistan, and an alphabet soup of manias from conglomerates to utilities including technology companies, cash shells and property. Oh, and there was the millennium bug. Remember that?
Prosperity came from North Sea oil, the end of the Cold War, globalisation, freer markets, freer trade, and cheaper imports that meant falling inflation and interest rates and a painful shift from uncompetitive manufacturing to a service based economy. It was, especially later on, financed by rising indebtedness, accompanying the rise in confidence.
Now some of those trends are abating or reversing, it’s tempting to imagine the first two decades were a glorious period for investors, where you only had to be in the stockmarket to be successful. The third decade is much harder work, and maybe the next one will be too.
In the late 1990’s the mantra was investing is easy, all you had to do was buy and hold. That view seems much less fashionable now.
But I didn’t invest in the eighties, or for much of the nineties, so perhaps my reading glasses are rose-tinted and it wasn’t as easy as buy and hold then, either. What do you think?
In practice:
Not yet Armageddon
Despite the gradual ebbing of the market in the last two weeks, its value as measured by the long-term price earnings ratio is still 11. That’s cheap, but not quite in bargain territory, meaning it’s a good, but not perfect time to be buying shares.
Looking at inflated prices compared to book values and historic PE ratios, David Rosenberg is more cautious about the US stockmarket, concluding:
…it is unlikely that we have crossed the Rubicon into new bull market terrain. As a result, the best advice is for active rather than passive investment strategies, and to maintain a conservative income-oriented tilt over the near-to-intermediate term across asset classes.
Notice he doesn’t say buy and hold.
I go along with the conservative element of his prescription, without being too concerned about income. That means ferreting out good companies at cheap prices. There will be some in my list of financially strong companies with high F_scores and low long-term price earnings ratios:
The table is ordered by year end, so the company with the most recent financial year end is top (all are within the last six months). Ggearing is the percentage of total assets that is shareholders’ equity, and EPS count is the number of years of earnings data used in the long-term PE calculation. The data is from Sharelockholmes.com and Sharescope.
Next Monday’s company profile will probably come from this list.
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