Any Happy Returns

Chapter 13Summary and Conclusions

The past is always tense and the future, perfect.

—Zadie Smith

Cycles

The history of markets shows patterns of both cycles and longer‐term trends, or super cycles. In The Long Good Buy: Analysing Cycles in Markets, I looked at the cycles throughout history and pointed to some important indicators that can help investors to identify repeated patterns and possible triggers for inflection points in markets. In this book, I have focused more on the longer‐term trends. Most cycles evolve within these longer‐term trends.

Cycles tend to repeat themselves in equity markets despite very different economic and political environments. The cycles of the past 70 years can typically be split into four distinct phases, each driven by distinct factors (for example, expectations of changes in future growth rates or in valuations).

1. The Despair phase. The period when the market moves from its peak to its trough, also known as the bear market. Prices fall on average by around 35% over 14 months.
2. The Hope phase. This is typically a short period (on average nine months in the United States), when the market rebounds from its trough valuation, or the P/E multiple expansion. This occurs in anticipation of a forthcoming recovery in the economic cycle, as well as future profit growth, and leads to a rise in the trailing P/E multiple. Prices rise by an average annualised 67% over nine months.
3. The Growth phase. This is usually the longest period (on average 49 months ...