The analysts at Montanaro Asset Management have a lovely chart in their client presentations (sadly, it’s not publicly available). It looks at the average number of months a bull market has lasted in the UK and then at the average returns those bull markets have produced. The numbers are 56 months and 203%.
This could be seen as bad news: the current one has already lasted an impressive 120 months, making it the longest since the great bull market of 1975 to 1987 (152 months). You might think that makes it near its end. But look to the actual returns of this bull and things look better: so far the UK market is only up 106%. There’s a long way to go to hit the average.
This is not exactly an objective science. But it does leave room to argue that being too bearish is a bit silly. The same goes for the (highly contentious) argument that we should judge the bull as starting not from the depths of the market misery of 2009 but from the point at which it regained its pre-crash levels.
Do this, say the analysts at Ardbrook Investors, and the bull run in the US started in March 2013 (when the Dow Jones Industrial Average finally hit a new record). In this view, it is a mere 74 months old with a return of only 83%. That’s nothing in the context of a really good bull market.
There’s also no sign in today’s markets of the kind of major bull market peaks that come at the end of a proper melt up – and just before the meltdown. Think of the 200% surge in the late 1990s or the 240% rise in the late 1920s. Look around you and will see a lot more worried-looking fund managers than you’ll see euphoric ones.
Overall, says Ardbrook, the performance of the market from March 2013 to now looks a lot more like the early parts of the bull markets of the 1950s and 1980s than anything else – which leaves lots of room to be bullish.
That’s particularly the case given two other factors. First, there is our lowish inflation environment: when equity valuations move above their historic norms it is almost always when inflation is knocking around the 1%-4% sweet spot. And second, there is a good case to be made that we are entering an extraordinary period for equity markets – one in which valuation and returns will stay high for longer than it is usually reasonable to expect.
A huge productivity boom is on the way
The argument is straightforward. Thanks to digitalisation – the conversion of physical information into digital form which leads to automation, data analysis and process optimisation – there is a huge productivity boom on the way. You will sniff a little at this and note that digital technology is hardly new and that 75% of workers are no more productive today than they were in 2000. The ones that are work in the sectors that can easily take advantage of the technology, such as media and finance.
The rest – resources, healthcare and the like – are flatlining. So much so that economists spend a huge amount of time talking about the productivity problem. Is it because everyone’s on Facebook at the time? Is it because cheap labour discourages capital investment? Is it because our education system has lost its way?
But to fret about all this could be to forget just how long it takes for a general purpose technology such as digitalisation (a general purpose technology is one that can affect the entire economy) to really get mass traction.
Look at the lag between the introduction of the railways, electricity, mass transportation and even computing and productivity gains, says Ardbrook. They tend to take 20 years to turn up: electricity was first mass produced at the turn of the 20th century but it wasn’t until the roaring twenties that its economic benefits really began to be felt.
That could happen again. Those in doubt need only look to shale: the existence of the oil was never a secret; nor was the method of getting it out, should you be able to find it. But it was inexpensive cloud computing that prompted the data analysis that made finding it and getting it out worthwhile. The result was the transformation of the oil industry and a 60% rise in energy-related jobs in the US.
I love this argument; it’s simple, it’s compelling, and if it comes good, we can all stop worrying about the woefully inadequate growth in our personal pension plans.
But it’s not all plain sailing
The problem is that digitalisation isn’t the only new macro trend in our world – and some of the others don’t have such a happy feel. There is the return of geopolitics and in particular the risk that we are on the edge of a long and trying cold war with China (we are still calling it a trade war, but it could easily morph) and the protectionism plus inflation that is likely to bring.
There is the coming decline in the world’s working-age population and the tight labour market that is creating (note that employment in the US is no longer rising as fast as it was, possibly because there isn’t anyone left to employ).
At the same time, real wages are on the up – which is good news for employees but not such good news for employers – and the populist tide is clearly turning against big corporations and in particular the oligopolistic behaviour that keeps their margins up. Luca Paolini, Pictet’s chief strategist, notes that, in the US, profits as a percentage of GDP are already edging lower – back to single digits from a historical peak of 11.7%. So how do we pick our way through all these trends?
The key point, perhaps, is that if the digitalisation as transformational GPT argument works in the US, it works in other countries too. So, while I accept that if you take out the official technology sector, the rest of the US market is not as overpriced as it seems, why not hedge yourself against rising productivity being overwhelmed by, say, protectionism, by putting new money in stockmarkets that are starting from a cheaper base? Pictet’s forecasts (and Montanaro’s chart) suggest the UK is a good place to start.
• This article was first published in the Financial Times