Andrew Van Sickle editor@moneyweek.com
“Stocks always go up,” investors liked to insist in the 1980s and 1990s. They didn’t say it quite so much in the 2000s when stocks went down and they had been exposed as bull-market geniuses. Of course, in the very long run, stocks will tend to go up, as shares of corporations can be expected to appreciate with the overall economy. But the very long run – even in the absence of political upheaval, abysmal economic management or war, as the Japanese market has reminded everyone – can be very, very long indeed (see page 4).
The Nikkei’s ascent to new highs was widely celebrated by Japan bulls, which we at MoneyWeek have been for a very, very long time – since around 2003, in fact (we are often a tad early). But the 34-year wait could have been much longer. As Deutsche Bank pointed out in a note this week, the Indian stockmarket spent almost 90 years trying to regain a record peak set in 1896.
The extremely long term
The next-longest wait was in New Zealand – around 75 years. So much for data going back to 1800. Looking back at the longest periods without new record peaks since 1950, the Philippine stockmarket is at the top of the table. It took about 37 years to eclipse a high set in 1969. Few investors are worrying about statistics like these following the new record peaks for the MSCI World, Stoxx 600 and S&P 500 indices, as they all hit records within the past several years. But the air is getting very thin for the bulls, especially in the US, which sets the tone for world markets.
Valuations, which tend to revert to the mean, have reached eye-popping levels, with the cyclically adjusted price/earnings ratio (Cape) of the US market at 34, compared with the record high of 44 in 2000 (the previous peak was in 1929). Secular changes in the macroeconomic backdrop also militate against further significant progress.
Across the developed world, corporate earnings as a share of GDP have doubled since the 1990s, having remained steady for the previous two decades. The jump was due to lower interest rates reducing the cost of debt and corporation taxes falling. These two trends have reversed in recent years, and hopes that interest rates will fall back to their previous levels look likely to be dashed. Core inflation is still at 4% in the US and the job market remains tight. In the UK, the latest survey of purchasing managers highlighted higher shipping costs (owing to the
