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
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.