Saturday, November 15, 2014

Stock Market: Welcome To The New Secular Bull Market

(Drivebycuriosity) - This week US stock prices climbed onto a new all-time high. Since the begin of the recent bull market in spring 2009 they have gained around 200%. There is a lively discussion about how long this rally could continue. Many skeptics predict that the bull market had reached its peak and soon a new bear market will begin.

I disagree. Yes, a correction (minus 10-15%) could happen anytime, but the dip should be short lived and constrained. I believe that the bull market will stay alive for many years. I agree with those who think that we are still in the beginning of a secular bull market meaning an upwards trend lasting more than 10 years (washingtonpost).

As you can see in the chart above, since World War II there were already two secular bull markets: The first happened from 1948 through 1966, the second from 1982 through 2000. Both periods of climbing stock prices lasted more than 15 years and in both times stock prices multiplied with the factor 10!

There are at least 4 causes for a new secular bull market:

1. Companies have learned from the last recession - and they are still learning. They have been responding to the crisis and became more efficient and cost savvy. Since spring 2009 companies have been reducing costs & debts and are getting more efficient. Now they are much leaner and productive than they were before which translates into climbing profits - the engine of the bull market, as the chart below shows. Governments and private persons also reduced their debts. There is no reason why this learning process should end soon. As a result the US economy is getting sounder and I suppose Europe will follow in 2015 because the "old continent" is getting tailwinds from the strong US economy (exports) and cheaper energy.

2. Globalization is still going on in spite of problems in many emerging countries. Low income countries like China & India are catching up (I described this here driveby). People in many emerging countries are working hard and are investing to narrow the income & wealth gaps the wealthy "West".

3. We are experiencing a new technological revolution (I wrote a lengthy post about this subject: technology). I think that  rapid advances in software & Internet (including cloud computing), robotics, 3D printing, nanotechnology, genetic engineering and other technologies are all lifting the productivity of the economy significantly and are creating new markets. I also believe that the technological progress is fostering globalization. Emerging countries like China and India have easier access to new technologies which is promoting their transformation into modern economies. These processes are working together, creating global economic growth in the decades to come.

4. Oil prices, which have caused many recessions in the past (chartoftheday), seem to be constrained. Rising oil production in the US - thanks to new technologies - has been lifting the global oil supply which should keep energy prices at bay.

I suppose that these 4 trends are all working together and are amplifying each other.

There is a high probability that we will experience a decade - or more - of inflation free economic growth - comparable to the years 1982-2000 - which should translate into similar gains on the stock market.


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