Peter Oppenheimer, Goldman Sachs’ chief global equity strategist, has published a new book. Titled “The Long Good Buy”, the book looks at bull markets and their denouement in the US and in the UK over the past 300 years. Oppenheimer’s book “…describes multiple types of bull and bear markets, including cyclical, event-driven, structural and even non-trending.”
This Reuters piece uses the framework given in the book to look at the stockmarket correction through Jan-March 2020 and the subsequent rally: “Oppenheimer argues that technological, regulatory and other changes – like the internet, low interest rates and globalization – can affect the shape and duration of cycles. This is why identifying inflection points isn’t as simple as, say, pointing to an inverted yield curve and hitting “sell.” Especially because mini cycles occur even as longer trends persist.
So how does this help make sense of this year’s Covid-19 market swings? At first glance, the S&P 500 Index’s almost 35% plunge to a late-March low seems like an event-driven bear market. Unlike cyclical bear markets, which are normally the result of declining profit expectations, rising inflation and interest-rate and recession fears, event-driven plunges are typically caused by exogenous shocks, emerge amid low inflation and are short-lived….
Yet a closer look suggests that what may be happening – with the recent market rebound – is the continuation of a longer cycle. Oppenheimer points out that after 2009 the U.S. economy grew at a weaker pace compared to other post-1950 recoveries, yet the equity market performed well above average. It eclipsed its previous peak within four years. In comparison, after the crises that began in the U.S. in 1929 and Japan in the 1990s, equity prices were languishing under 50% of their peak even a decade later.
So the severe disconnect investors are currently experiencing between the real and financial economies is not a new phenomenon. It actually may be fairly predictable. After all, many of the forces driving equity prices in the past decade – such as ultra-low rates, aggressive central bank bond buying and the outperformance of technology stocks – have only accelerated in the most recent crisis.”
An even better review of this extremely useful book can be found on the website of the UK’s Society for Professional Economists. Their Lavan Mahadeva highlights how Oppenheimer has categorised a bull market into various phases: “…valuations cycle above and below future fundamentals. As Oppenheimer outlines, if you bought equities at the end of the 1990s when there was strong economic data and profit growth, you would have been destroyed in the first few years of the new millennium that followed. The valuation metrics of the US equity market in late 1999 were at the highest of levels. He reminds us that Robert Shiller’s (CAPE) Price/Earnings ratio is negatively correlated with the next ten years of annualised returns. (Warning: his correlation would not be so high if he had used semi-log regression). Conversely, if you bought into US equity in summer of 1982, when the CAPE was at a low and even before unemployment peaked, but held for five years, returns would have been over twenty percent.
Oppenheimer argues that equity investments made during the hope phase typically yield the highest annualised returns and most of this is from price not earnings. Though indicators such as profits are still falling in this phase, they are bottoming out. But this is also the briefest of the four phases—while hope is only 9 months, then the growth phase takes over for 49 months, then optimism lasts about 23 months, then despair lasts about 16 months and so on. The book is not technical analysis: Oppenheimer does not suggest strategies that require predicting timing of these phases but wants us to think of this as a framework.” (Source: https://spe.org.uk/reading-
Although the book went into print just before the Coronavirus struck, there are several portions of the book which are pertinent to the world in which we find ourselves today: “Now in a low inflation-low interest rate environment, equity valuations should be more sensitive to growth and fiscal policy. Oppenheimer also discusses different types of corporate business models and how the share price of each type of firm should then respond across different phases. But not only that. My favourite chapter was on bubbles where he shows that the best indicators of a bubble were often ‘’soft’’ ones such as deregulation, financial innovation and a belief in a new era and technology. The last two chapters bring us closer to date with an analysis of the post-crisis landscape, ultra-low yields and technology, all of which shows us that we are always sailing in new waters, and only the market’s reaction to processing change is familiar.”
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