Wednesday, February 27, 2013

Stock Market: What We Could Learn From History - Reasons For A Perpetual Bull Market


These days there is an active discussion whether we are still in a bear market or if a new bull market already has started. The usual definition says that a bear market begins when stocks (or other assets) have fallen at least 20%. Otherwise a bull market starts after gains of at least 20%. Often a bear market is defined as a lengthy period without cumulative stock gains and a bull market as a lengthy period with rising stock prices.

The (perpetual) bear market camp refers to the fact that the stock prices today are close to the peak from spring 2000, that means that on balance they have been stagnating for around 13 years.

I am definitely in the perpetual bull market camp. I reckon that the start of the recent rally in February 2009 was the begin of a long term or perpetual bull market and the demise of the bear market which has started in Winter 2000.

The long term chart of the Dow Jones Averages above tells us that stock prices have been rising over the years extremely, on average around 7% per year. But there were very long breaks: Stocks have been virtually unchanged from 1929 to 1949, then from1962 to 1982 and from 2000 to 2012. After all those breaks followed long and strong bull markets: From around 1949 to 1962 and from 1982 to 2000.

I believe that a very long period of climbing stock prices has already began, comparable to the phase 1982 to 2000. Then the Dow multiplied 10 times!

I see at least 4 reasons for this perpetual bull market:

1. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and translates into a long term trend of rising company profits.

2. We are experiencing a new technological revolution, meaning rapid innovations in computing (including mobile devices like iPads & iPhones), engineering, robotics, nanotechnology and other fields. All these processes are further enhancing the efficiency of the companies and create new markets. These trends should fuel economic growth and therefore generate gains on the stock markets over many years to come.

3. The global economy will get a lot of tailwinds from the emerging markets thanks to the catching up process of China and other emerging markets. People in Asia, Latin America & Africa  have a tremendous backlog demand because income & fortune are much lower than in the Western world. But there are billions of talented & diligent people who want to reach the US and European standard. Therefore those people are working hard and they are investing to be able to expand their consumer expenditures in the decades ahead.

4. Inflation rates are at historical lows. Hence central banks don´t have to raise interest rate sharply to break inflation which often caused a recession in the past. Therefore the low interest rates will continue for years and inspire investments that will add to the economic growth.

I believe that these beneficial developments will strengthen one another and lead to a new period of prosperity and continuous gains on the stock market.

1 comment:

  1. I was going to argue with you that from 2000 to 2012 the market hasn't been flat, indeed DJIA has gained 38%, but over a decade that's really nothing considering the advancements in technology and our lives. So... yes, you have a very good analogy here, and very good points I have to say.
    I'm thinking DJIA 15,500 or 16k by end of the year.