The Japanese experience of the last 30 years has resulted in a lost generation and a half of market returns. I wonder what financial advisors in downtown Tokyo were saying to their clients around New Year in 1990. Were they concerned about valuations? Did they go out of their way to discuss the risks that their clients were taking as a result? The culprit, it seems, is one of applied common sense – as opposed to industry dogma. My impression is that very few advisors (in fairness, the industry was different back then) said anything at all about valuations in 1990.
Perhaps the advisors were oblivious to valuations. Perhaps they thought they were somehow justified. Perhaps they thought there was, “no way we could drop by over 80% in such a robust economy…” or some such thing. Those sentiments seem horribly misguided when looking back from 2020.
Today, most economists think of Japan as having a zombie economy, where disinflation has given way to outright deflation and where unfortunate demographics have caused a once-mighty economy to flounder to the point where growth is nearly impossible and impervious to monetary stimulus. Interest rates have been below zero for some time in Japan, yet there are still relatively few signs of robust – or even hopeful – levels of economic expansion.
It is easy for people in North America and Western Europe to look smugly at Japan as if the events there are unique. They are not necessarily so. While demographics are certainly more favourable here in Canada due to high levels of immigration, it would be folly to carry on as though some low-level repeat of the Japanese experience might not befall us or our American neighbours. Given the ridiculously high valuation levels in Japan 30 years ago, one cannot help but wonder if we’re heading for a merely less extreme repeat performance in North America soon. Virtually all the stock market gains in 2019 (and much of 2018) were due to multiple expansions; not increases in corporate earnings.
Despite the warning signs, relatively few people – and especially relatively few advisors – seem to be worried. If valuations are high, expected returns for the foreseeable future are very likely to be low. What thought have you given to the possibility of a lost decade (or more) for your stock portfolio?
