Here’s Why Analysts Are Warning of a ‘Lost Decade’ for Public Equities

The 1970s and the 2000s are well-known ‘lost decades’ for public equities. If we take a longer view, however, we can see that these weren’t the only periods when stocks lagged behind other asset classes. In the decades ending in 1858 and 1940, for example, markets had negative nominal equity returns.

What’s more, there’s reason to believe that we may be in for another lost decade for stocks. Analysts at Stifel, a leading full-service investment firm, believe that “investors who are passive are going to suffer” in the coming years.

There are a number of factors that contribute to this pessimism. Stifel’s chief equity strategist points to supply chain disruptions, geopolitical rivalries, fiat currencies, indebted governments, populism, profit margin and regulatory pressure as key concerns. All of these factors could lead to slower global growth, which would in turn hit corporate earnings and equity prices.

Negative Catalysts Ahead for Public Markets

Russia’s invasion of Ukraine highlighted the fact that geopolitics can have a real impact on markets. The resulting sanctions led to a sharp sell-off in Russian stocks and put pressure on other emerging markets. This event was a strong reminder that the world is not as stable as it may seem, and that geopolitical risks can have a material impact on markets.

Any escalation of this conflict would lead to further market volatility . In addition, the U.S.-China trade war continues to escalate, with no end in sight. This could lead to more tariffs and other protectionist measures that would disrupt global supply chains and put pressure on corporate profits.

Even worse, Stifel’s chief strategist remarked that “Xi Jinping is not going to die without making a try [for Taiwan].” This is a very real possibility that could lead to a major conflict between the U.S. and China.

Geopolitical risks aside, there are also a number of economic factors that could lead to a lost decade for stocks. One is rising labor and material costs, which could stall margin growth and put pressure on corporate profits. In addition, interest rates are rising, which will increase the cost of borrowing for companies.

Perhaps most importantly, price-to-earnings multiples grew from 13 to 23.6 over the decade that ended December 31, 2021, meaning that stocks are now historically overvalued.

Private Markets Positioned to Outperform

Investors who are looking for growth need to look beyond public markets, and this is exactly what high-net-worth individuals and institutional investors are doing. While the mass affluent invests only 6% of their assets in alternatives, ultra-high-net-worth individuals invest 46%.

Historically, private markets have outperformed public markets time and time again. In the “lost decade” for public markets after the dot-com crash, private equity maintained a 7.5% average.

Several factors are driving this continued outperformance. For one, there is an increasing number of high-quality companies that are staying private for longer. Furthermore, private markets are characterized by longer holding periods and less liquidity , which allows for a more patient and value-oriented approach.

Additionally, PE firms have an asymmetric information advantage, as well as significant amounts of dry powder to deploy in a downturn. This allows them to take advantage of distressed situations and buy companies at attractive valuations.

Finally, the current public market environment is ripe for a shift to private markets. Investors nearing retirement age need to be mindful of preserving capital, and they’ve been burned by multiple major market corrections in the past few years. As such, private markets are looking increasingly attractive as a place to deploy capital for growth.

The 1970s and the 2000s are well-known ‘lost decades’ for public equities. If we take a longer view, however, we can see that these weren’t the only periods when stocks lagged behind other asset classes. In the decades ending in 1858 and 1940, for example, markets had negative nominal equity returns.

What’s more, there’s reason to believe that we may be in for another lost decade for stocks. Analysts at Stifel, a leading full-service investment firm, believe that “investors who are passive are going to suffer” in the coming years.

There are a number of factors that contribute to this pessimism. Stifel’s chief equity strategist points to supply chain disruptions, geopolitical rivalries, fiat currencies, indebted governments, populism, profit margin and regulatory pressure as key concerns. All of these factors could lead to slower global growth, which would in turn hit corporate earnings and equity prices.

Negative Catalysts Ahead for Public Markets

Russia’s invasion of Ukraine highlighted the fact that geopolitics can have a real impact on markets. The resulting sanctions led to a sharp sell-off in Russian stocks and put pressure on other emerging markets. This event was a strong reminder that the world is not as stable as it may seem, and that geopolitical risks can have a material impact on markets.

Any escalation of this conflict would lead to further market volatility . In addition, the U.S.-China trade war continues to escalate, with no end in sight. This could lead to more tariffs and other protectionist measures that would disrupt global supply chains and put pressure on corporate profits.

Even worse, Stifel’s chief strategist remarked that “Xi Jinping is not going to die without making a try [for Taiwan].” This is a very real possibility that could lead to a major conflict between the U.S. and China.

Geopolitical risks aside, there are also a number of economic factors that could lead to a lost decade for stocks. One is rising labor and material costs, which could stall margin growth and put pressure on corporate profits. In addition, interest rates are rising, which will increase the cost of borrowing for companies.

Perhaps most importantly, price-to-earnings multiples grew from 13 to 23.6 over the decade that ended December 31, 2021, meaning that stocks are now historically overvalued.

Private Markets Positioned to Outperform

Investors who are looking for growth need to look beyond public markets, and this is exactly what high-net-worth individuals and institutional investors are doing. While the mass affluent invests only 6% of their assets in alternatives, ultra-high-net-worth individuals invest 46%.

Historically, private markets have outperformed public markets time and time again. In the “lost decade” for public markets after the dot-com crash, private equity maintained a 7.5% average.

Several factors are driving this continued outperformance. For one, there is an increasing number of high-quality companies that are staying private for longer. Furthermore, private markets are characterized by longer holding periods and less liquidity , which allows for a more patient and value-oriented approach.

Additionally, PE firms have an asymmetric information advantage, as well as significant amounts of dry powder to deploy in a downturn. This allows them to take advantage of distressed situations and buy companies at attractive valuations.

Finally, the current public market environment is ripe for a shift to private markets. Investors nearing retirement age need to be mindful of preserving capital, and they’ve been burned by multiple major market corrections in the past few years. As such, private markets are looking increasingly attractive as a place to deploy capital for growth.

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