Cult of equities is dead. Long live equities You might call it the prayer of all financial commentators: "O Lord, save me from becoming a contrarian indicator." Any big pronouncement can be wrong. This is particularly true of markets, which at their extremes are driven by waves of sentiment. The press, often unwittingly, picks up on these waves. John Authers Everyone remembers the book called Dow 36,000, featured by Atlantic Monthly at the top of 2000 tech boom. That predicted the Dow Jones Industrial Average, would hit 36,000. It currently stands at about 12,000. Such hubris obviously portended a fall. Similarly, most financial journalists are aware of the BusinessWeek cover that proclaimed The Death of Equities - ahead of the great 1982 equity bull market. Of course, it was a buying signal. So an FT piece that I helped write this week, trailed Death of Equities? on the front page, causes trepidation. Have I just generated a great buying opportunity? On balance, I think not. There are two issues here; timing, and the broader prospect for the market. The timing of those famous headlines was not quite as perfect as many believe. BusinessWeek pronounced the death of equities on August 13 1979 - and the bull market did not start until August 12, 1982. Anyone buying US stocks on the back of that cover would have lost 4.8 per cent before the bottom was hit. Taking into account dividends and inflation, they would have lost 14 per cent in three years. True, if they had held on to the very top of the market in early 2000, they would have multiplied their money 11 fold - but the timing was far from perfect. As for Dow 36,000, it hit the cover of the September 1999 issue of Atlantic Monthly. This was a fantastic time to buy the Nasdaq, then in the last stage of its bubble. From then to its peak, on March 10 the following year, the Nasdaq Composite gained a stunning 87.1 per cent. Emotions at market tops and bottom can be truly extreme. Timing the best entry point, with press headlines or anything else, is impossible. Still, for long-run investors, betting against those headlines was a good idea. Having declared the death of the cult of the equity, have we not really declared that the time is right to start a new one? I believe not. Let us define terms. The "cult of the equity" refers to the belief that equities should trade at a lower yield than bonds because their income can grow over time while bonds" income is fixed. This belief took force after a 1954 speech made by George Ross-Goobey, manager of Imperial Tobacco's pension fund, announcing that he was transferring his fund into equities because valuation was compelling. For the previous half century, investors had demanded a higher yield from equities because they were more volatile. The critical shift was in perception of risks. At present, as I have said before, equities look cheaper versus bonds than they have in half a century. This means, more or less by definition, that the first cult of the equity is over. It also provides a necessary condition for the beginning of a new one. But it is not a sufficient condition. Equities do look cheap, relative to bonds, because bonds are incredibly expensive. All else equal, that should mean people start selling bonds - and buy at least some stocks with the money they release. But talk to fund managers, and it is obvious that they are buying bonds not because they are in the grip of a cult or bubble mentality, but because regulations force them to do so. This is financial repression - to deal with the debt they took on to quell the credit crisis, governments are forcing us all to lend to them at ruinously low rates. While artificial incentives to buy bonds stay in force, bonds could stay expensive - and equities could stay relatively cheap. In absolute terms, stocks do not look so cheap, and the backdrop is not as propitious for them as it was in 1954. Rob Buckland, Citigroup's chief global equity strategist, proclaims that the equity cult is "still dying." When Mr Ross-Goobey spoke, he points out, baby boomers were at school, not retiring, there was no inflation-protected bonds market to hedge against inflation (equities had to do that job), and equities were not heavily correlated with other assets, as they are now. Further, stocks had been doing well for 10 years, to encourage people into the market (investors now are traumatised by the 2008 crisis). And yet in absolute terms they were cheaper than they are today, yielding 1.4 per cent more than inflation then, and 0.5 per cent less than inflation now. For Mr Buckland, "basing an investment (or business) strategy around an imminent return of the equity cult looks premature." That appears to be right. Once financial repression ends and rates are allowed to return to normal, there will be another cult of the equity. Timing that can only be guesswork. I fear, however, that financial repression has a way to go.