I don´t know whether you have noticed, but something happened on the stock markets this week.
Take the DAX Total Return, a well-constructed index (unlike the Dow Jones). The index had been hitting a ceiling at 6300 points a number of times this year but never managed to get through. This week, we have passed 6400 points for a couple of days now. This might be a sign that it is time for you to invest your money in stocks.
Last time the DAX reached 6400 points, this was in early September 2008, more than 2 years ago, before the Lehman disaster was announced. 6400 points were also reached in early 2007, while the DAX was on its way to a high of 8000 points reached only 6 months later. Before that, you had to go as far back as February 2001 to see the DAX at 6400 points, on its way down to a low of 2200 points reached in March 2003.
Does that mean that the DAX could hit 8000 points soon? I don´t know. And nobody knows, really. The only thing that I know is that the DAX has been at 8000 before: in March 2000, July 2007 and December 2007. So getting there once more is not impossible. Some say that as the DAX performance has been rather disappointing on a 10-year period basis (2000-2010: the lost decade for stocks?), the index has some catch up to do.
The DAX Total Return index was launched on 31.12.1987 at 1000 points. Assuming 6500 points at end 2010, this gives a CAGR of 8.5%. Assuming 8000 at end 2010 would give a CAGR of 9.5% over the period, so only 1% point more. This does not sound too crazy. Take the S&P 500 Total Return index as comparison. The index has grown from 274 points on 31.12.1987 to 1837 points at 31.12.2009, giving a CAGR of 9.6%. So a DAX at 8000 sounds quite reasonable from that perspective
The DAX P/E is also currently rather low at about 10. As comparison, the average P/E of the S&P 500 between 1871 and 2009 was 16, and the average between 1991 and 2009 was 27.
Turn it on its head and look at the dividend yield: current dividend yield of the MSCI Europe is at 3.4%. Between 1985 and 2010, the dividend yield of the MSCI Europe has broadly remained between 2% and 4%, and even reached 6% in 2008. So at 3.4% you are making more money on the dividend yield alone than on treasury bonds. And some high dividend yield stocks have much higher yields. Deutsche Telekom currently has a dividend yield of 7% for example.
At the end of the day, the level of the DAX is the result of supply and demand for the equity of the companies that make the index. Supply has been rather limited, with very few IPOs in the last 2 years and a number of share buy-backs. Demand has been low since the beginning of the financial crisis, with huge amounts of cash hoarded in treasury bonds, money market papers and savings accounts. The interest rates you get on this kind of investment are currently rock bottom (well, close to 0% actually).
So it would not take much for people to realise that they are better off buying shares on short to medium term perspective. The “reward profile” is currently asymmetric: risk is limited, and return could be high. Imagine the DAX at 8000 at end 2011: this would give you 25% return over the next 15 months!
So what should you buy? If you like all share funds, go for Carmignac Investment A (ISIN FR0010148981) for example. Its performance has been great over 3, 5 and 10 years. If you like to mix shares with bonds to sleep better at night, go for Carmignac Patrimoine A (ISIN FR0010135103). Also great performance over 3, 5 and 10 years. More info can be found there: www.carmignac.fr.
So time to get out of boring savings account and treasury bonds!