My Sunday Business Washington Post column is out. I sometimes forget they are a mainstream paper, not a business publication, and they let me get away with things the Economist or Barron’s never would. Like the headline in the print edition is a perfect example: “The trend is your friend until that nasty bend at the end.” The online version is the more traditionally headlined: Smacked by big market swings, investors should alter their outlook.
Its one of my first attempts at explaining secular market cycles to a non-investing professional audience.
A few weeks back, we discussed the reasons traders were rethinking risk. A combination of the slowing economy, a potentially weakening profit picture and European bank problems had finally convinced them that stock prices were too high.
But what investors really need to understand comes down to one word: Trend.
Markets tend to move in long-term cycles. The overall economy oscillates through periods of greater and weaker growth. These are driven by big macro factors that last not for quarters or even years, but decades. These changes lead to significant economic changes and are often the impetus of major expansions. Then, after a decade or two, they fade and are replaced by periods of softer growth, or worse.
Over the past century, numerous “secular” long-term trends have played out. The results have been surprisingly predictable.
The long economic trend after World War II was very supportive of markets. Millions of servicemen returned home, married, had kids, created the baby boom. We created suburbia, built out the interstate highway system. And after years of footing the wartime effort, the private sector could once again refocus on peacetime production of goods and services. All of this begat a huge expansion, and from 1946-66 we had a 20-year secular run in stock markets with 500 percent in gains.
Click for PDF of dead tree version
Smacked by big market swings, investors should alter their outlook
Washington Post, August 21 2011
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