SECULAR TRENDS IN FINANCIAL MARKETS (i highly recommend downloading and reading the whole 19 page document)
globalfindata.com
nice website as well
globalfindata.com
Bryan Taylor
What about tops and bottoms in bonds and commodities? The Dow Jones Bond Average showed important tops leading to at least 10% corrections in 1917, 1928, 1937, 1946, 1977, and 1993 with bottoms occurring in 1920, 1932, 1942, 1970 and 1982. The 1946-1982 bear market in bonds was the worst in the history of fixed-income markets. The Bureau of Labor Statistics/Knight Ridder Commodities Research Bureau Index showed significant tops in 1920, 1925, 1951, and 1981 with important bottoms occurring in 1915, 1921, 1932, 1972 and 1992. By means of comparison with the United States, we can look at the bond market and commodity prices in London using the British consol and the Economist Commodity Price Index. The British consol declined in price from 1900 through 1920, rose in price until 1934, had a brief bear market until 1939, then rose again in price until the final top in 1946. From there British consols lost over 80% of their value between 1946 and 1974 before beginning a bull market once again with a minor top in 1977 and a minor bottom in 1982. The Economist Commodity Price Index’s tops and bottoms were similar to those in the CRB Index, with tops in 1920, 1951 and 1980, and bottoms in 1932 and 1972. There was also a minor top in 1937 and minor bottoms in 1939, 1949 and 1962. In analyzing this pattern of market tops and bottoms, several years recur as being key turning points in all financial markets. The first turning point occurred in 1920/1921 which was a bottom for stock and bond markets and a top for commodity markets. 1932 was the next important turning point when all financial markets reached important bottoms. After concurrent moves upward in the 1930s, financial markets began moving in opposite directions in the 1940s. Bond markets began a 35-year bear market in 1946, stock markets began a steady bull in 1949, and commodity markets stabilized after 1951. These trends remained intact until 1972 when commodity prices began rising again, and stock markets topped out. In 1982 bond and stock markets began their strongest bull markets of the decade while commodity prices stabilized. The table below summarizes these patterns showing the major trends which have occurred during the twentieth century, though it should be remembered that there were also cyclical fluctuations within these secular trends.
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As this table shows, there is no consistent pattern in the interaction of the three markets at any one point in time. There were periods in which all were increasing, from 1932 to 1946, periods when stocks and bonds moved in opposite directions, from 1946 until 1973, and periods in which stocks and bonds both increased in value, since 1982. However, several important relationships should be noted. Commodity markets and the bond market clearly move against one another. The only period when the two moved in the same direction was between 1932 and 1946, and this was primarily because of government intervention in and regulation of commodity prices and interest rates. Each of the crisis periods in stock markets was marked by dramatic changes in commodity prices, inflation in the 1910s and 1970s, and deflation in the 1930s. It was not the commodity inflation which caused stocks to decline, but excess demand which caused prices to rise or collapse, and which squeezed corporate profits simultaneously. Commodity inflation has been a symptom of underlying financial and economic problems more than a problem in and of itself during the twentieth century. The stock market has shown its strongest performance when commodity prices are stable, not when commodity prices are increasing or decreasing. Periods when commodity prices were increasing should be considered relative bear markets for stocks. In the three periods in which commodity prices increased (1914-1921, 1932-1949, and 1973-1982), stock markets made little headway in nominal terms and declined when measured in real terms. The period since 1982 has provided the best conditions for financial assets since financial markets were founded in Amsterdam in the Seventeenth Century with strong bull markets in both stocks and bonds and stable commodity prices.
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Another potential problem lies in these countries’ demand for raw materials. If the two billion people in China and India make the same demands on the world’s raw materials as Europeans and Americans do, commodity price inflation will be inevitable. China’s move into the Spratly islands or Iraq’s move into Kuwait shows the potential for economic and financial problems that this demand for raw materials could create in addition to higher inflation.
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These trends could be worsened by developments in emerging markets. As the economic power of Asian and Latin American countries grows, they will demand increases in political power and access to markets in Western countries. As investment opportunities improve in emerging markets, capital could shift from developed economies to emerging economies causing large outflows of capital from Western economies. As demand for goods increases, so will the demand for raw materials. Commodity inflation will reappear as billions of individuals who are admitted to the world’s middle classes demand the same standard of living as those in the rest of the world.
Under these circumstances, the value of financial assets could decline as sharply as they did in the 1910s, 1930s and 1970s. |
