Tina – ‘there is no alternative’ – is the only Wall Street acronym that matters
By shunning stocks when their prospects seem poor and alternatives seem enticing, you will miss more rallies than crashes
IN FINANCIAL markets, the acronym Tina stands for “there is no alternative”, and is typically uttered by investment analysts and advisors in reference to equities. It is most often bandied about when the performance of stocks is disappointing and their future prospects seem anaemic, yet valuations remain high.
Even if there are no good reasons to buy stocks at the moment, Tina argues investors should stay in the market because there is no other place to go.
Starting about six months ago, analysts from top Wall Street firms began attacking Tina, claiming there are actually good alternatives to stocks for investors. For example, on Sep 26, the strategists at Goldman Sachs promoted Tara – “there are reasonable alternatives” – over Tina, recommending investors underweight stocks in favour of cash.
In hindsight, that was not a good choice, as stocks have rebounded almost 10 per cent above inflation, while a Treasury bill has returned 1.7 per cent, roughly the same as inflation.
Of course, we cannot conclude much from one five-month test, so I looked back using market data since 1871 from Yale University professor Robert Shiller.
Everyone knows that stocks do better than bonds on average, with the total return – price gains plus dividends – for the S&P 500 Index beating the total return for 10-year Treasuries in 62 per cent of one-year periods, and averaging 8.6 per cent per year above inflation versus 2.9 per cent for 10-year Treasuries. Stocks have considerably more volatility, 19.3 per cent versus 8.8 per cent for bonds, but still provide a better risk-adjusted return.
Tina-bashers only come out when equity prices are down, and bond yields and equity valuations are up. So, what if we only look at times when inflation-adjusted total returns for stocks are more than 10 per cent below their prior peak, and bond yields and equity cyclically adjusted price-earnings ratios are above their averages over the prior 10 years?
In the 21 times before 2022 that all three happened together, stocks averaged 24.7 per cent above inflation over the next year, versus 2 per cent for the 10-year Treasury. Stock volatility was low, 10.6 per cent, and not much above bonds at 8.2 per cent. Only once, in 1893, did stocks lose to inflation or bonds over the subsequent year.
Nevertheless, the Wall Street acronym wars have continued, with Deutsche Bank promoting Tapa – “there are plenty of alternatives” – and Insight Investment coming up with Tiara – “there is a realistic alternative”.
Bank of America reports that professional fund managers have much lower-than-normal allocations to developed-market stocks, and are instead favouring cash, bonds, emerging-market equities and commodities.
Of course, past performance is no guarantee of future results, but if the reason for shunning stocks is that recent performance has been disappointing, and bond yields and equity valuations are high, then it is fighting history – investing like it is 1893.
The economic argument for Tina is not a one-year tactical play, but a long-term strategic thesis. Stocks represent an interest in future corporate profits. If companies do not make money, they will have trouble paying their bonds. Not only that, but they will not pay taxes and they will not create jobs or raise wages, so individual tax receipts can fall – while unemployment and other social benefit costs increase.
So governments may have trouble paying off their bonds and maintaining the value of the currency. There will not be much demand for commodities, and emerging-market economies may have difficulty maintaining export earnings. Real estate and other asset prices can fall.
Over a year or two, stocks can decline without taking everything else with them, but essentially all investments require robust long-term growth in corporate profits to provide good inflation-adjusted total returns.
Sure, stocks can punch investors in the gut with 40 per cent or larger declines, but either they come back (as they have in the past) or everything else goes too. The best investors can hope for is to share in general prosperity; no piece of paper will help investors thrive while everyone else is suffering. This economic story, plus long-term history, underlies the “stocks for the long run” case.
I do not deny that some clever traders can improve risk-adjusted returns with shrewd market timing, although it seems to me there are more failures than successes at this game, and it can run up expenses and taxes. I also believe in broader diversification than the major large cap equity indices, with international, small cap, emerging market, factor portfolios and other indices; or even a risk-parity allocation that includes credit, interest rates and commodities (and leverage).
Nevertheless, call me a friend of Tina. In the long run, we are all betting on stocks. You can tilt the nature of your exposure to equities and get some additional diversification, but I do not think you can build portfolios to prosper in the long run when equity prices fall. In the short run, shunning stocks when prospects seem poor and alternatives seem enticing will miss more rallies than crashes. BLOOMBERG
