The Next Secular Bull Market

As Newton’s and Einstein’s scientific ideas became mainstream in the 20th century—and with the fall of the Berlin Wall in 1989—the world, while prosperous, became a little boring. The Cold War era of secret government agents, spy planes, and a common enemy lost its allure among the American populace. Gone also were the myths—those of ancient Egypt, Greece, and Rome as students became more “practical” and studied finance, economics, engineering, and business. The Space Race no longer mattered. While the liberalization and civil rights movements allowed women and minorities to explore more life and career options, many of us could no longer find any “outlet” to channel our energies and passion, with the exception of work and family life. The advent of the internet and social networking meant we could now find out what our neighbors and friends are up to at any moment—thus eliminating any remaining intrigue and mystique in our lives. Suddenly, that trip to Spain, Thailand, Fiji, New Zealand or even the North Pole doesn’t sound so exotic and exciting, especially when holiday photos are posted real-time on Facebook.

In today’s age of rationality, material comfort and political correctness, many of us crave for excitement, or even seduction. This urge is especially powerful for the repressed (by the church, family heritage, significant other, etc.); or those who never quite satisfied those childhood dreams. Louis XV, having the misfortune to immediately succeed the “Sun King,” is a prime example. Jeanne Antoinette Poisson–a highly ambitious woman–sensed his powerful inferiority complex and yearn for excitement/seduction immediately upon meeting him. Madame de Pompadour would go on to become one of the most influential figures in the life of Louis XV and the French court until her death.

The late 1990s in many ways provided the perfect environment for the stock market to seduce the masses, namely the seduction to invest in technology and internet stocks. Americans needed an outlet—not just for their savings (which were at record highs)—but also for their repressed desires and yearn for excitement. The bull market also provided an intellectual and spiritual touch, as every upswing in semiconductor or biotechnology stocks further reinforced investors’ self-confidence. The market was proving them correct—surely they were more intelligent than what college professors (whose meager salaries could not compare to their stock market gains) told them 10 or 20 years ago? And given the potential for these companies to change the world—in essence shifting from an information to a biotechnology era—surely investing in these stocks were a patriotic and a spiritual endeavor? Many of these investors also realized the ideal of a Jesse Livermore, Bernard Baruch, or even JP Morgan in them in the late 1990s. Like virtually all seductions, though, this was not to last.

The greatest danger in a seduction lies not in hate, repulsion, or resentment—but simply indifference. Extending this analogy, it is not the lack of earnings, high interest rates or even financial dislocation that characterizes major bear market lows (July 1932, April 1949, and April 1982). It is the genuine lack of interest or resources to invest in stocks. By 1932 (with the U.S. dividend yield at 14%), families were more concerned with feeding and clothing themselves than investing in the stock market; and whatever funds they had invested needed to be spent on food and clothing. By 1949, investors haven’t witnessed a major bull market in 20 years; and no respectable college graduate went to work for Wall Street. Ditto for April 1982. Valuations did not matter at those times (although they were good entry points, in retrospect).

Today, with the recent bull market still etched into people’s memories (especially in emerging markets), and with the clever invention of automatic 401(k) deductions, we cannot imagine a revisit to the March 2009 lows anytime soon. While we understand there needs to be a revolutionary change in much of the developed world’s social welfare programs, many major countries are coming to this realization (with the exception of Japan). Italy has no imminent solvency problem as long as its 10-year yield remains below 6.75%. Combined with the ECB’s promise to purchase more Italian and Spanish sovereign debt (along with the possible implementation of QE3), our outlook for U.S. stock prices is relatively benign.

That said, there needs to be a confluence of events in order for the masses to be “seduced” into stocks again. There needs to be a theme or a series of technological innovations (and commercialization) that could change the global economy in a revolutionary way and capture the imagination of investors, such as the commercialization of the quantum computer, second-generation biofuels (which would replace gasoline as a transportation fuel almost overnight), carbon nanotubes, nanotech-based drug delivery systems, etc. As such, we are not looking for a resumption of a secular/1990s style bull market. Rather, over the next five years, we expect U.S. stocks to return at an annualized rate of 5% to 7%.

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