The Long Good Buy Analysing Cycles in Markets

PRAISE FOR THE LONG GOOD BUY:

"Oppenheimer offers brilliant insights, sage advice and entertaining anecdotes. Anyone wishing to understand how financial markets behave – and misbehave – should read this book now."

Stephen D. King, economist and author of Grave New World: The End of Globalisation, the Return of History

"Peter has always been one of the masters of dissecting financial markets performance into an understandable narrative, and in this book, he pulls together much of his great thinking and style from his career, and it should be useful for anyone trying to understand what drives markets, especially equities."

Lord Jim O'Neill, Chair, Chatham House

"A deeply insightful analysis of market cycles and their drivers that really does add to our practical understanding of what moves markets and long-term investment returns."

Keith Skeoch, CEO, Standard Life Aberdeen

"This book eloquently blends the author's vast experience with behavioural finance insights to document and understand financial booms and busts. The book should be basic reading for any student of finance."

Elias Papaioannou, Professor of Economics, London Business School

"This is an excellent book, capturing the insights of a leading market practitioner within the structured analytical framework he has developed over many years. It offers a lively and unique perspective on how markets work and where they are headed."

Huw Pill, Senior Lecturer, Harvard Business School

"The Long Good Buy is an excellent introduction to understanding the cycles, trends and crises in financial markets over the past 100 years. Its purpose is to help investors assess risk and the probabilities of different outcomes. It is lucidly written in a simple logical way, requires no mathematical expertise and draws on an amazing collection of historical data and research. For me it is the best and most comprehensive introduction to the subject that exists."

Lord Brian Griffiths, Chairman - Centre for Enterprise, Markets and Ethics, Oxford

PETER C. OPPENHEIMER has 35 years of experience working as a research analyst. He is chief global equity strategist and head of Macro Research in Europe for Goldman Sachs. Prior to joining Goldman Sachs, he worked as managing director and chief investment strategist at HSBC and was previously head of European strategy at James Capel. Prior to that, he was chief economic strategist at Hambros Bank. Peter began his career as an economist at Greenwells in 1985. He enjoys cycling and painting.

Acknowledgements xiii

About the Author xvii

Preface xix

Introduction 1

Part I: Lessons from the Past: What Cycles Look Like and What Drives Them 9

Chapter 1: Riding the Cycle under Very Different Conditions 11

Chapter 2: Returns over the Long Run 29

Returns over Different Holding Periods 31

The Reward for Risk and the Equity Risk Premium 35

The Power of Dividends 38

Factors That Affect Returns for Investors 41

Market Timing 41

Valuations and Returns of Equities versus Bonds 43

The Impact of Diversification on the Cycle 45

Chapter 3: The Equities Cycle: Identifying the Phases 49

The Four Phases of the Equity Cycle 50

Mini/High-Frequency Cycles within the Investment Cycle 58

The Interplay between the Cycle and Bond Yields 61

Chapter 4: Asset Returns through the Cycle 63

Assets across the Economic Cycle 63

Assets across the Investment Cycle 66

The Impact of Changes in Bond Yields on Equities 68

The Point of the Cycle: Earlier is Better 72

The Speed of Adjustment: Slower is Better 74

The Level of Yields: Lower is Better 74

Structural Shifts in the Value of Equities and Bonds 76

Chapter 5: Investment Styles over the Cycle 81

Sectors and the Cycle 83

Cyclical versus Defensive Companies 85

Value versus Growth Companies 90

Value, Growth and Duration 92

Part II: The Nature and Causes of Bull and Bear Markets: What Triggers Them and What to Look Out For 97

Chapter 6: Bear Necessities: The Nature and Shape of Bear Markets 99

Bear Markets Are Not All the Same 100

Cyclical Bear Markets 106

Event-Driven Bear Markets 107

Structural Bear Markets 109

Interest Rate Cuts Have Less Impact on Structural Bear Markets 111

Price Shocks: Deflation is a Common Characteristic 113

Belief in a New Era/New Valuations 113

High Levels of Debt 114

Equity Market Leadership Becoming Narrow 114

High Volatility 115

The Relationship between Bear Markets and Corporate Profits 115

A Summary of Bear Market Characteristics 117

Defining the Financial Crisis: A Structural Bear Market with a Difference 118

Finding an Indicator to Flag Bear Market Risk 119

Typical Conditions Prior to Bear Markets 121

A Framework for Anticipating Bear Markets 124

Chapter 7: Bull’s Eye: The Nature and Shape of Bull Markets 127

The ‘Super Cycle’ Secular Bull Market 127

1945–1968: Post-War Boom 129

1982–2000: The Start of Disinflation 131

2009 Onwards: The Start of QE and the ‘Great Moderation’ 133

Cyclical Bull Markets 134

Variations in the Length of Bull Markets 136

Non-trending Bull Markets 138

Chapter 8: Blowing Bubbles: Signs of Excess 143

Spectacular Price Appreciation . . . and Collapse 146

Belief in a ‘New Era’ . . . This Time is Different 150

Deregulation and Financial Innovation 157

Easy Credit 160

New Valuation Approaches 161

Accounting Problems and Scandals 163

Part III: Lessons for the Future: A Focus on the Post-Financial Crisis Era; What has Changed and What It Means for Investors 167

Chapter 9: How the Cycle Has Changed Post the Financial Crisis 169

Three Waves of the Financial Crisis 171

The Unusual Gap between Financial Markets and Economies 174

All Boats Were Lifted by the Liquidity Wave 178

The Unusual Drivers of the Return 179

Lower Inflation and Interest Rates 180

A Downtrend in Global Growth Expectations 182

The Fall in Unemployment and Rise in Employment 183

The Rise in Profit Margins 185

Falling Volatility of Macro Variables 187

The Rising Influence of Technology 189

The Extraordinary Gap between Growth and Value 190

Lessons from Japan 196

Chapter 10: Below Zero: The Impact of Ultra-Low Bond Yields 201

Zero Rates and Equity Valuations 206

Zero Rates and Growth Expectations 208

Zero Rates: Backing Out Future Growth 210

Zero Rates and Demographics 215

Zero Rates and the Demand for Risk Assets 217

Chapter 11: The Impact of Technology on the Cycle 221

The Ascent of Technology and Historical Parallels 222

The Printing Press and the First Great Data Revolution 223

The Railway Revolution and Connected Infrastructure 224

Electricity and Oil Fuelled the 20th Century 226

Technology: Disruption and Adaption 226

Technology and Growth in the Cycle 227

How Long Can Stocks and Sectors Dominate? 231

How High Do Valuations Go? 233

How Big Can Companies Get Relative to the Market? 235

Technology and the Widening Gaps between Winners and Losers 238

Summary and Conclusions 241

References 249

Suggested Reading 259

Index 265

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