January 27, 2023

Off the Charts: A Historical Cycle Bodes Ill for the Markets

A major reason for the earlier confidence was that in the 15 years from the end of 1984 through the end of 1999, the total return of the Standard Poor’s 500-stock index was more than 740 percent, even after adjusting for inflation. That amounted to a compound annual real return of more than 15 percent.

At the end of 2011, by contrast, the 15-year return — from the end of 1996 — was just 3 percent. And most of those gains came in the first three years of the period. Since the end of 1999, the stock market has not come close to keeping up with inflation.

The first of the accompanying charts shows compound 15-year real returns on stock market investments from the period that ended in 1943 through the one that ended last month.

Broadly, it appears there is a cycle that is repeating itself, in which the 15-year return tops out at more than 15 percent and then falls precipitously.

In June 1964, the real return over the previous 15 years averaged 15.6 percent a year, the highest that figure had ever been. The stock market did not begin to fall then, but it could no longer maintain the torrid pace, and the 15-year return figures began to decline. On a real total return basis, stock prices hit their highs for the era in late 1968, and by the mid-1970s were in free fall as high inflation combined with a bear market.

By 1979, an investor who bought stocks in 1964, when the market seemed to be a sure moneymaker, had lost money after adjusting for inflation, even after including dividend income.

In the early 1980s, the stock market turned around, and by mid-1997 the 15-year return figure had reached a new high of 15.8 percent.

The second chart overlays the two cycles. The first line goes from the end of 1943 through the end of 1980, when the line was in negative territory. The second one, beginning at the end of 1980, continues through the end of last year.

The match between the lines is far from perfect, but there are significant similarities. If past is prologue, the 15-year return is likely to continue to decline and to turn negative in about four years. That does not necessarily imply that stocks will fall during that period, since that could happen with small gains over the period. And, of course, there is no assurance that history will repeat itself.

It is probably significant that opinion surveys show Americans are more pessimistic than they have been in many years. There is a fear that the American economy is in decline and that this country will be unable to compete with emerging Asian economies, principally China. There was a similar fear in the late 1970s, although then the fear was that the United States could not compete with Japan.

Perhaps overconfidence inspired in part by a strong stock market also played a role in American military history. Within a few years after the 1964 peak for 15-year returns, the United States escalated the Vietnam War. Within a few years after the 1999 peak, the United States decided to invade Iraq.

The other two charts indicate that the stock market may have done surprisingly well over the last 15 years, considering how little the economy grew over that period. Through the third quarter of last year — the most recent data available — real gross domestic product had risen at an annual rate of just 2.3 percent over the previous 15 years. That was the lowest return since the 15 years ending in 1960, a period that was distorted because it included the rapid decline in real gross domestic product in 1946 as the production of weapons halted after World War II.

Similarly, over the last 15 years the total real personal income earned by Americans has risen at an annual rate of just 2.6 percent. That is the lowest for any similar period for which G.D.P. data is available. Both the G.D.P. and personal income rates of growth are well below where they were when the cumulative stock returns bottomed out in 1982.

After the pessimism of the late 1970s and early 1980s, the economy and the stock market turned around as it became clear the American economy was resilient and could adapt to a changing world. The question now is whether that can happen again.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=3a91deadddebcd385c97913a62fa1454

Fast Growth and Inflation Threaten to Overheat Chinese Economy

“Prices have gone up a lot,” Mr. Wang said at a vegetable market Friday. “It’s a very bad thing to have prices go up and down. Unstable prices make people nervous and make society unstable. In this sense, our generation even has some nostalgia for Mao’s era.”

This is the predicament China finds itself in today: Fast growth has fired up the country’s economic engines, but it has also led to stubbornly high inflation, which threatens to overheat the economy and undermine the long-running boom that the country has experienced.

The latest evidence of this came Friday when China said its economy had grown 9.7 percent in the first quarter of this year, certainly the strongest performance among the world’s biggest economies. But the government also said that in March the consumer price index had risen 5.4 percent from the level of a year earlier, the sharpest increase in 32 months.

Analysts were not surprised by the figures, but some experts say they believe they may understate the real rate of growth and inflationary pressure. Bank lending, for instance, picked up strongly last month, and food, energy and raw material prices have risen sharply this year. In March alone, the government said, food prices rose 11.7 percent.

To prevent overheating, Beijing is trying to moderate growth and rein in inflation. During the past six months, the government has tightened restrictions on bank lending, raised interest rates, increased agricultural subsidies and even prevented Chinese companies from raising consumer prices.

Analysts, however, say the results have been mixed. Growth has begun to moderate from the torrid pace of 10 percent annual growth last year, but inflationary pressure has not abated; in fact, it has strengthened. Some analysts say inflation may not peak until June.

Although the government has promised to tame the property market, housing prices continue to climb, and much of this country’s growth continues to be fueled by real estate projects and government investment in infrastructure.

In the first quarter of this year, fixed asset investment, a broad measure of building activity, jumped 25 percent from the level of a year ago and real estate investment soared 37 percent, the government said Friday.

Gasoline prices have also jumped sharply, in line with global oil prices. Gasoline prices in China have risen from about $3.82 a gallon, or $1 a liter, in 2009 to about $4.50 a gallon today. Fast food chains have raised prices, and during just the past year the price of fruit has jumped more than 31 percent.

Export prices are also rising because of higher commodity, raw material and labor costs. And since China is the world’s biggest exporter, what happens in its coastal factories could eventually have a major effect on prices in other parts of the world.

Indeed, in the country’s biggest export zones, factory bosses regularly complain about worker shortages and higher labor costs.

The government has encouraged higher wages in the hopes of reducing the big income gap between the rich and the poor, and the urban and rural. But that is driving up the costs of production.

Many analysts say the government is going to have to do more to tame inflation.

“Despite the most aggressive period of tightening in years, the government cannot seem to slow the economy down,” Alistair Thornton, an analyst at IHS Global Insight, wrote in a research report Friday. “With inflation expectations still running high and prices at disconcerting levels, the government will need to press on with its tightening schedule.”

China’s current boom got under way in early 2009, during the global financial crisis, when Beijing moved aggressively to increase growth with a $4 trillion government stimulus package and record lending by state-run banks.

A loose monetary policy and big investments in local government projects revived powerful economic growth that analysts say quickly sent land, housing and food prices soaring.

As early as 2009, however, there were already concerns about the health of Chinese growth, largely because of worries about high property prices, heavy bank lending and overly aggressive investing by local governments, many of which had been amassing huge debts.

Article source: http://www.nytimes.com/2011/04/16/business/global/16yuan.html?partner=rss&emc=rss