The global financial crisis ended six years ago. US shares are up by 212%, global shares up by 159% and Australian shares are up by 91 %( owing to the high-interest rates and the commodity collapse. In this article, we are analyzing where exactly we are in the investment cycle.
Many people express concern over the fact that the cyclical bull market in the US is almost six years old and hence it puts us at a risk of a cyclical bear market.
In the last 64 months, the shares in the average US bull market rose by 177%. There are some points to counter the widespread fear that the US economy is at the threshold of another bear market. First of all, there is no uniformity in the occurrence of the bear and bull market. The time span between each bear market and bull market is not uniform and hence is not predictable. So, one can make a safe assumption that the 19% fall in US shares in mid-2011 was a Bear market. Hence, the current cycle of 92% gain in 42 months is below average. Also, the global and Australian shares did have a bear market in 2011. The Australian shares in the current bull market are up by 51 % over 43 months. See next table.
Cyclical bull markets in Australian shares since WW2
The investment cycle
The next chart shows a stylized version of the investment cycle.
A typical cyclical bull market in shares has three phases.
- Phase 1 starts off when the economic conditions are not strong enough, and most investors are wary about investing their money. However, smart investors take advantage of this situation of low-interest rates and low bond yields.
- During phase 2, the economic growth turns up, and the investors become optimistic about their shares.
- In phase 3, the economic conditions soar, and the investors are very happy. However, strong economic growth causes inflation problems, and the banks tighten their monetary policy. The bond yields get higher, and this sets the stage for another bear market.
The duration of a bull phase varies depending upon how quickly the inflation and overvaluation happens, investors euphoria appear, etc. though under usual conditions, it lasts for 3- 5 years.
So, the most important question here is to ascertain whether we are at the exhaustion point for another bull market. One way of finding that out is by analyzing the economic conditions, inflation pressures, market valuations, investor sentiments, etc.
However , once there is a gap between share market yields and bond yields, the shares still look cheap.
The growth of the global economy is not very rapid. Considering the previous standards, It is growing at a constrained pace. A constrained and slower recovery is a longer recovery. However, the good news is that the spare capacity remains significant globally. This means that we are a long way from inflation and debt excesses.