Current Events,  Mile High View,  Super Cycle

What in the World is Happening to the Stock Market?

Did you know that 60% of the revenues for companies in the S&P 500 are generated overseas, outside the United States?[1] It is important when looking forward to stock market performance in 2020 and beyond to understand what is happening to the world GDP and world economy.

This is the first of two eLetters in which I will give you my views on the stock market in 2020.

The best analysis I have seen was done in 2011 and is, in my opinion, still valid today.

Standard Chartered Bank, a large bank based in London, released a study in which they state that the world is in a “worldwide economic super cycle.”[2] A supercycle is “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.”[3]

Standard Chartered identified two previous super cycles; the first supercycle covered the years 1870-1913 and the second ran from 1945 to 1973. The next super cycle began in 2009, they theorize, and may run until 2030 or even longer.

The first supercycle, from 1870-1913, was driven by the industrialization of the United States. World GDP grew at over 1% on the average, compared to the rate in the 50 years preceding the supercycle. Nevertheless, it was not an easy period. From 1874 to 1907 there were six financial crises like 2008.[4] On the other hand, in 1870 approximately half the US working population was employed in agriculture. As the financial crises wiped out the farmers, and unemployment soared, those workers moved to the cities, and an industrial age followed as new businesses were created. The steam engine, gas lighting, and textile machinery, along with other technology, accelerated economic growth in the United States. In 1870, the United States was the fourth largest economy in the world (9% of world GDP). By 1913, the United States was the largest economy, accounting for 19% of world GDP.

The second supercycle lasting from 1945 to 1973 was driven by the post-war reconstruction of Europe. Like the first supercycle, this one was also driven by widespread adoption of new technology like cars, airplanes, TVs, and refrigerators. The Japanese economy grew from 3% of worldwide GDP to 10%, and they became the second largest economy in the world, surpassing Germany. The Asian Tigers, Korea, Taiwan, Hong Kong, and Singapore, experienced high growth.

The new supercycle, according to Standard Chartered, will last through 2030 and will be driven by the emerging economies. Global trade, urbanization, high investment rates, rapid adoption of new technologies, and urbanization among some 85% of the world’s population living in these emerging nations will accelerate world growth and underpin the new supercycle. Estimates are that by 2030, 93% of the world’s middle class will live in those emerging nations.[5]

Twenty-five years ago, I had a client who was a plant manager for American Standard in Tianjin, China. The plant was making toilets, bath tubs, and shower stalls. At the time the plant began its manufacturing not one of the 1,000 employees had ever seen a ceramic toilet, bath tub or shower stall. Now, all those employees are part of the middle class. They own cars, smartphones, and drink lattes.

In both of the first two supercycles, there were companies and industries that were big winners and big losers. There were smaller cycles within the supercycle. There were recessions and difficult times along with the good times. I believe as we go forward over the next 10 or so years, we will experience the supercycle, but also greater swings in the economy and in the stock markets. I have mentioned in previous emails that I believe we will see a significant increase in the DOW Jones and S&P 500 indexes over the next several decades. It will not be an easy time, but it should be, in my opinion, a good time for creating and preserving wealth. It will be important to be invested in those companies that will benefit from the supercycle and avoid those which will probably do poorly.

Being in the right stocks will be very important.

This is the first of two eLetters about my outlook for the 2020 United States stock market. In some ways, this is the mile high view that undergirds the growth of the US stock market. Remember that 60% if S&P 500 revenues come from overseas. That is an increase from just over 40% in 2003.

I will give you my forecast for the US stock market in the next eLetter. 


[1] Valetkevitch, Carline and Sinead Carew, “Factbox: What a falling dollar means for the S&P 500 sectors,” Reuters, Published January 26, 2018, https://www.reuters.com/article/us-global-dollar-usa-stocks-factbox/factbox-what-a-falling-dollar-means-for-sp-500-sectors-idUSKBN1FG00Y.

[2] Lyons, Gerard, “The Super Cycle Report,” Standard Chartered, Published November 15, 2010, https://www.sc.com/id/_documents/press-releases/en/The%20Super-cycle%20Report-12112010-final.pdf.

[3] Lyons, ibid.

[4] Think about it! Half the years from 1874 to 1907 were similar to what we experienced in 2008. It was a difficult time. There had been financial crises before 1874, namely in 1792, 1819, 1837, and 1848. Each time either the US government, the Bank of England, or the Bank of France had bailed out the US banking system, as happened in 2008 with the Fed and Treasury pumping money into the banking system. But in 1874, the decision was made not to bail out the banking system. The arguments against a government bailout of the banks were similar to the ones we heard in 2008: to let businesses fail and let the free market operate. It did not work. It was finally in 1907 that the US government created the Federal Reserve to be the central bank and lender of last resort,

[5] “Developments and Forecasts of Growing Consumerism,” European Commission, Accessed December 19, 2019, https://ec.europa.eu/knowledge4policy/foresight/topic/growing-consumerism/more-developments-relevant-growing-consumerism_en.

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