The Charging Bull statue near the New York Stock Exchange (NYSE) in New York, US. (Source: Bloomberg)
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’s most often bandied about when the performance of stocks is disappointing and their future prospects seem anemic, 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’s 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 Sept. 26, the strategists at Goldman Sachs Group Inc promoted TARA — “there are reasonable alternatives” — over TINA, recommending investors underweight stocks in favor of cash. In hindsight, that was not a good choice, as stocks have rebounded almost 10 percent above inflation, while a Treasury bill has returned 1.7 percent, roughly the same as inflation.
Of course, we can’t 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 percent of one-year periods and averaging 8.6 percent per year above inflation versus 2.9 percent for 10-year Treasuries. Stocks have considerably more volatility, 19.3 percent versus 8.8 percent 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 percent 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 percent above inflation over the next year, versus 2.0 percent for the 10-year Treasury. Stock volatility was low, 10.6 percent, and not much above bonds at 8.2 percent. Only once, in 1893, did stocks lose to inflation or to bonds over the subsequent year.
Nevertheless, the Wall Street acronym wars have continued with Deutsche Bank AG promoting TAPA — “there are plenty of alternatives” — and Insight Investment coming up with TIARA — “there is a realistic alternative.” Bank of America Corp reports that professional fund managers have much lower-than-normal allocations to developed- market stocks, and are instead favoring 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’s fighting history — investing like it’s 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 don’t make money, they’ll have trouble paying their bonds. Not only that, but they won’t pay taxes and they won’t 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 won’t 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 percent 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 don’t 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’re all betting on stocks. You can tilt the nature of your exposure to equities and get some additional diversification, but I don’t 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.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of “The Poker Face of Wall Street.” He may have a stake in the areas he writes about.