Any Happy Returns

Structural Changes and Super Cycles in Markets A summary of the book by Peter C. Oppenheimer

Short-term cycles are important, but long-term trends, or super cycles, tend to have a dominant impact on investor returns. In this book, I discuss the very long-term trends in some of the key fundamentals that impact financial markets. These include economic activity, inflation and interest rates, government debt and inequality. In terms of financial markets themselves, the combination of these and other factors, such as social attitudes, policy and geopolitics, can substantially affect returns for investors.

Loosely speaking, for risky assets such as equities, some of these long-trending periods can be described as ‘Fat and Flat’ – relatively long periods during which cycles oscillate around relatively flat returns. Others are secular bull markets – long periods in which cycles continue to operate but within an upward-trending trajectory.

Fat and Flat

The five major super cycles in developed economies

2000-2009

Total real returns: −58% Annualised returns: −9% This was an era dominated by bubbles. The collapse of the technology bubble of 2000 dominated the first part of the super cycle. Falling interest rates provided the conditions for the US housing bubble and its eventual collapse. The financial crisis that followed resulted in a deep structural bear market.

1982–2000

Total real returns: 1,356% Annualised returns: 16% This was the period I call the Modern Cycle because it was much longer, with less volatility, than the traditional cycles that preceded it. This era was dominated by disinflation and a falling cost of capital. Supply-side reforms in economies boosted margins.

1968–1982

Total real returns: −39% Annualised returns: −4% This was a period dominated by high interest rates and inflation, labour unrest, a collapse in global trade and rising government deficits.

1949–1968

Total returns: 1,109% Annualised returns: 14% This was a period of strong economic growth, institution building and lower geopolitical risk premia. A baby boom and rapid technological change resulted in a powerful consumer boom.

2009–2020

Total real returns: 417% Annualised returns: 16% This was an era dominated by zero interest rates and quantitative easing (QE). Rising valuations and the dominance of the US equity market and technology drove a large wedge between Growth and Value.

In developed economies there were five major super cycles between the end of World War II and 2020. Each has had different drivers and return profiles, which are a function of the confluence of economic, political and social drivers.

The Pandemic

The Covid-19 pandemic triggered a brief event-driven bear market, and US equities fell 34% in total real terms. But the combination of interest rate cuts (where still possible), more QE, huge fiscal support and successful Covid vaccines resulted in a powerful rebound. In 2021, the S&P 500 rose by 27% (or 29% including dividends), ranking in the 85th percentile of all annual returns since 1962. While technology once again dominated (as consumers were limited to online shopping during lockdowns), the emergence of inflation and higher interest rates ushered in a new ‘Fat and Flat’ market range.

The Post-Modern Cycle

Leadership and return profiles in equity markets shifted with the end of pandemic restrictions and the era of ultra-low interest rates in 2021. A new inflationary dynamic unfolded. The shift in the level of interest rates has driven a new discipline in the economic system and in valuations of financial assets as we enter what I describe as the Post-Modern Cycle. The emerging Post-Modern Cycle is being shaped by a combination of different drivers:

As we move into the Post-Modern Cycle, new major challenges will increase the focus on technology as a solution. In particular, the focus on energy efficiency and decarbonisation should increase investment in technology companies that can enhance efficiency (as opposed to selling consumer products in particular). High technology and tradition can coexist. The biggest company in the United States is a technology company, whereas in Europe the biggest company manufactures handmade high-end leather goods and fashion. Bifurcation and selectivity will be key for investors, just as innovation and adaption will be key for companies.

Rise in the cost of capital.

Slowdown in trend growth.

Shift from globalisation to regionalisation.

Rise in the cost of labour and commodities.

Increase in government spending and debt.

Rise in capital and infrastructure spending.

Changing demographics.

Order Any Happy Returns from your favourite bookseller.

Lorem ipsum dolor