Market History: Secular Cycles - Part 2

Hi, thanks for returning! I wrote about cycles last week and attempted to identify the secular cycles persisting since a century ago. Let's continue with our journey.

# 1940 - 1959 : Secular Bull Market

As US was drawn into World War 2, the US Federal government ran enormous deficits to fund the war against the Nazis in Europe and Japanese in Far East. Government spending % GDP rose to over 53% while debt % GDP exceeded over 110% during the war years. After the war, massive US investments and loans were made to re-build war-torn Europe and Japan. The war brought about rapid expansion to the sluggish US economy otherwise still in the throes of the Great Depression. Peace and prosperity returned for most Americans.

In an effort to free international trade and fund postwar reconstruction, nations began fixing their exchange rates by tying their currencies to the US dollar (Bretton Woods agreement) as the US government pledged a US dollar to 35 oz of gold bullion. The US dollar became a reserve currency for many nations and it began replacing the Sterling pound as the currency for international trade and commerce. The start of the Gold standard ushered in the golden age of the US dollar.

The end of WW2 also created heightend state of tension between the former Soviet Union and US as each fought for supremacy and over ideological differences. The fight against fascism and imperialism in WW2 had turned into a containment war against communism. This brought about the US invasion of Korea in the South in 1950 as fear escalated that Soviet Union would "export" communism to other Asian nations, following the fall of the Nationalist government in China to communist Mao.

Over this 2-decade period, corporate earnings rose strongly. Market EPS grew from $0.10 in 1940 to $0.35 by 1959 (3.5 times increase) buoying the S&P500  from 13 to 60 (4.6 times increase). US economy grew by 5 times over same period. This strong market performance, coupled with only shallow pullbacks, had all the makings of a secular bull market. This was the golden era for the US and Americans.

(a) World War 2 (1939-1945):

      - Market declined 38% over 30 months
      - Full recovery took 26 months

(b) Korean War (1950-1953):

       - Market actually moved higher by over 20% during this period.

# 1960 - 1979 : Secular Bear Market

While the US economy continued to grow strongly over the following 2 decades, the world was plagued by regional conflicts (such as in Middle East and the Vietnam War) and significant turbulences in the world's economic system. President Kennedy was also assassinated in 1963.

Apart from the Cold War rivalry between the former Soviet Union and the US which culminated into an arms race and a race into space (US Apollo landing on the moon in 1969), the collapse of the Bretton Woods system in 1971 created huge market turmoil when the US dollar was offically de-linked from gold and exchange rates were allowed to float. This transition to a fiat currency and managed float system was rocky and characterized by plummeting stock prices, skyrocketing oil prices, bank failures and severe inflation. This set off a decline of the US dollar and appreciation of gold prices, reaching $800 an oz by 1979.

In the midst of these turbulences, Nasdaq opened in 1971 and a few important technological innovations were achieved in the US. ARPANET, a predecessor of the Internet we know today, was set up in 1969 by the US Department of Defense in partnership with four universities. The first desktop computer (Altair) was developed in 1974. A powerful technological revolution that was taking shape in the US eventually led to a multi-decade run-up in Nasdaq, reaching a high of 5000 points in 2000 from low of 55 in 1974 (a 90-fold increase over a 25-year period). 

By end-1979, the US economy expanded by 4.9 times compared to where it was in 1960. Market EPS grew from $0.35 in 1960 to $1.50 by 1979 (4.3 times increase) but S&P was at around 140, just about 2.3 times higher than it was 20 years earlier. This period also witnessed 4 market corrections of at least 20%. This was a secular bear market for equities characterised by slower price growth, increased volatilities and more frequent and steeper corrections.

(a) Correction 1 (1962) - Cuban crisis

      - Market dropped 28% over 3 months
      - Full recovery over next 10 months

(b) Correction 2 (1966)

      - Market dropped 21% over 8 months
      - Full recovery over next 7 months

(c) Correction 3 (1969)

      - Market dropped 35% over 17 months
      - Full recovery over next 22 months

(d) Correction 4 (1973) - Oil crisis / Arab Oil Embargo / Nixon's resignation

      - Market dropped 46% over 21 months
      - Full recovery only 6 years later


Please tune in again next week.

We will conclude our market analysis and we will find out where we are now in the cycle and make an attempt to see where our future will head towards.