Ageing bull or emerging secular boom?
Mikio Kumada is global strategist at LGT Capital Partners.
The current equity bull market is almost six years old. Given that the average American bull market since 1932 lasted only about four years, many market participants are wondering how much longer this rally can last. When it comes to equities, of course, there are always risks and potential accidents involved. Nevertheless, there are also arguments that suggest equities may have entered a long-term secular boom – comparable to the great bull run from 1980 to 2000.
The US stock market had an extraordinary bull run from 1980 to 2000. There were the occasional harsh setbacks, of course, like the Black Monday of 1987, or the Kuwait Crisis of 1990. Still, from the recession low in April 1980 to the dotcom bubble’s high in August 2000, the inflation-adjusted S&P 500 rose by a remarkable 9.8% per year – more than twice its annualized increase since 1932. Since the peak in 2000, however, the annual gain has dropped to just 0.3% (all calculations exclude dividends). In short: an unusually long stock market boom was succeeded by a similarly protracted period of volatility and weakness.
Hence, it would not come as a surprise if the current bull market, which began in March 2009, were to prove extraordinarily robust and durable. One established argument backing the case for a long-lasting – i.e. secular – bull market is that, in a world in which most major economies are facing deeply-rooted deflationary forces, global monetary policy is likely to remain very supportive for asset markets in coming years. Another – and more recent – argument was provided by last year’s steep drop in energy prices.
End of the commodity boom favors industrialized countries and consuming societies
From 1998 to 2008, we had a commodity boom that primarily benefitted the emerging countries. But the tide has now started to turn in favor of the older industrialized and services-based economies. The potential magnitude of this shift becomes particularly evident if we look at the inflation-adjusted – i.e. real – crude oil price. From a US perspective, the real barrel price has fallen from $67 in July 2008 to less than $23, with most of that drop occurring since last summer (see page 2, chart 1). If the real oil price remains low or even continues to fall, today’s equity bull market would gain what was perhaps the key trigger of the 1980-2000 boom.
Disinflation, falling interest rates, and cheaper energy were important drivers for last century’s greatest bull run – even though that was hardly self-evident initially. In the 1970s, the major economies were struggling with the aftermath of the “oil shocks”, while generous wage and public spending policies ensured inflation remained high. But as the 1980s began, policy makers began focusing on reducing inflation and controlling wages. Progress was slow at first, and gains in equity markets remained modest until 1982.
Oil slump as a symbol of tidal shifts
But then energy prices began to fall at an accelerated rate. In 1980, at the height of the Iran-Iraq War, the real oil price had peaked at around $100. By 1985, it had slumped to $20 to $25, or broadly the same level as today. By 1998, it had fallen to less than $8 – and stock markets, in what was once described as “irrational exuberance”, seemed to be headed to the stratosphere.
At the end of that bull cycle, of course, we saw the internet bubble burst, followed by the attacks of 11 September 2001, the wars in Afghanistan and Iraq, and the steady devaluation of the US dollar – developments that ultimately symbolized the decline of the US as a hegemonic power. Today, the dominant market narratives have either changed or received new and more balanced nuances.
At any rate, cheaper raw materials benefit the older economies of the West and Japan. Eventually, even their middle classes, which were among the relative losers of the preceding globalization cycle, could start to recover again. But there are also potential winners in the emerging markets, particularly among the technologically more advanced ones, such as South Korea.
China’s transformation from a low-wage manufacturing base toward a sophisticated consumer economy should also receive a boost and businesses around the world stand to benefit from such developments – which is in turn something that will be reflected in equity markets.