Stock Cycles:Why Stocks Wont Beat Money Markets Over the Next Twenty Years

Stock Cycles: Why Stocks Won't Beat Money Markets Over the Next Twenty Years Many of us are relying on the stock market to provide for us in our retirement.
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ROC was much lower after than before. Actual observed total return was only modestly lower. So far we have seen that around the way the stock market works changed in ways that reduced the average price of capital. There is an old Wall Street saying that the market is driven by fear and greed.

To do this required large swings in market levels i. The figure at the top of the page shows that secular bear markets after WW I ended at much lower levels than those before WW I. Presumably, the current secular bear market should be no different than the other three post-WW I ones.

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In this case, R serves as a proxy for the amount of capital in the economy. As capital and labor are both factors of production, GDP should be correlated with both.

Trading Stock Market Cycles Part 1

A decline in the top line eventually falls to the bottom line, and after about a decade lag, pre-tax ROC also began to decline. So the fundamental problem was that capital ceased to produce as much output per person after as it had before. Less output means less pre-tax and post-tax ROC. Since the ethos of capitalism is the maximization of profit, this constraining of profit can be thought of as an operational crisis in capitalism, that culminated, decades later, in the general crisis of the Great Depression. Capital that has a lower productivity than normal i.

If we use this in place of R we get:. Figure 2 shows a plot of equation with a constant of 44 used before and 42 afterward. This shows how the market priced capital based on its performance. Three peaks stand out, , and now. That the stock market was in a bubble in was confirmed by the tremendous decline afterward. The situation in is different. Like , was the end of a secular bull market during which conditions had long been favorable to investment and investors were understandably in a bullish mood.

When the market began to decline, the Fed sprang into action and slashed interest rates.


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The real estate market, which had been in a bull mode for several years, but was not yet seriously overvalued, responded favorably and housing prices and building activity remained fairly strong during the recession, resulting in a milder downturn both economically and in the stock market than might otherwise had happened. A side effect of a strong real estate market during the recession was an even stronger real estate market after the recession, which resulted in a bubble in which real estate prices got about as overvalued as stocks had been in The aftermath of this bubble was much more severe on both the stock market and the economy.

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Today the stock market is again approaching the valuations seen in and Stocks don't look particularly high because the impact of the drop in capital productivity over the last decade has not yet filtered through to the bottom line. Rising profit margins since have worked to offset falling capital productivity so as to maintain ROC at pre levels Figure 3. Trends in capital productivity, profit margin and ROC since Concerns over the sustainability of current margins, have been expressed:. You have to pay close attention to Mauldin's reasoning, which I'm obliged to disclose are based on the opinions of investor John Hussman, a closely followed investment adviser.

Stocks are priced too high because expected record profits are too far above normal corporate earning power. Fortunately, yields are great enough from one successful planting to provide for failure in 11 of the 12 months. All one needs is an infinite supply of seed. Unfortunately, dentist-retirees typically don't have the luxury of an infinite supply of retirement capital.

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Being a voracious reader, I constantly look for investment books that provide clarity and guidance. Books that can provide this clarity in the investment arena are rare; however, I have found two that I recommend. Both books are written by Michael A. For the decade-to-date Dec. In this decade, money market funds have outperformed stocks in line with Alexander's forecast. Since then, it increased to 1, again in fall , precisely in the neighborhood of the year highs.

The conclusions to Alexander's second book had the dry tone of a research scientist: What Alexander believes to be dominant in economic and stock market outcomes is the existence of a Stock Cycle.

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On the average, this is an year period that is either dominantly upward Bull Stock Cycle from to or dominantly downward Bear Stock Cycle from to Each K-Wave Stock Cycle component has characteristics. Alexander states that the last full K-Wave Cycle consisted of Winter: Each cycle was an alternating Bear, then Bull Stock Cycle between 16 to 20 years. Return to Book Page. Preview — Stock Cycles by Michael A.

For most Americans, a k plan is their first exposure to investing. Many of us are relying on the stock market to provide for us in our retirement yet at the same time, most of us are afraid of the stock market. It's a valid concern. How can something so important to our financial future be so completely unpredictable? When Michael Alexander first started investing in th For most Americans, a k plan is their first exposure to investing. When Michael Alexander first started investing in the stock market, he noticed that few analysts seemed to have much knowledge of what the market has done in the past.

While no one can give precise answers to questions about the future of the market and be right all the time, Alexander feels that it's possible to gain an understanding of the future of the stock market by studying its past.

Where is the stock market headed?

Analyzing years of historical data for patterns of behavior that might repeat in the future, Alexander provides strong statistical evidence for a cyclical pattern in the stock market. These Stock Cycles show that long periods of poor stock returns have always followed long periods of good returns.

Are we in for good times or is the party over? Paperback , pages. To see what your friends thought of this book, please sign up. To ask other readers questions about Stock Cycles , please sign up. Lists with This Book. This book is not yet featured on Listopia. Tang rated it it was amazing Jan 06, Susan rated it liked it Jun 08, Jim rated it it was amazing Feb 01,