If Kerry Balenthiran is to be believed, the world could enter a major bull market that will run until 2035
I?m a great fan of short investment books on the grounds that, while investing is not easy, its underlying principles are simple.
Kerry Balenthiran?s The 17.6 Year Stock Market Cycle certainly meets the brevity test ? I?d read it twice within a day of the author handing me a copy. You?re into the appendix by page 80.
It was the title that reeled me in, as was no doubt the intention of publisher Harriman House. The cyclical nature of stock markets is hardly new news but this degree of precision raises the prospect of a pattern that might be a useful investment tool rather than an interesting academic diversion. It nearly achieves this.
Looking for patterns is an occupational hazard of investing and Balenthiran?s references to all the cycles I?ve heard of ? Kondratieff, Schumpeter, Elliott Waves ? and a few I haven?t ? Juglar, Mills, Kitchin, Kuznets ? convinced me that while this may be a short book, it is the distillation of a great deal of reading and thinking about how stock markets work.
I also liked the simplicity of the approach. Start with the big dates that anyone with an interest in market history knows ? 1929, 1982, 1987, 2000, 2007 ? and work out how to link them. Balenthiran is a mathematician and an accountant, not an investor or economist, so he doesn?t get too bogged down in what was going on around these dates in the real world. Unlike Russell Napier?s excellent Anatomy of the Bear, this is more of a nod to Pythagoras and Fibonacci than a trawl through the archives of The Wall Street Journal.
Pitching the length of the stock market cycle between 17 and 18 years is not a stab in the dark. Many others have identified this approximate timescale, including Jim Rogers, who wrote in his book Hot Commodities: ?It looks as if God himself were a trader who enjoyed playing the stock market for 18 years or so and then switched to futures, until he got bored again after another 18 years or so and went back into the stock market.?
Even Warren Buffett, who tends to have more to say on individual stocks than markets, wrote in Fortune magazine in 1999: ?I think it?s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like they?ve performed in the past 17.?
Where Balenthiran?s work gets interesting, but more problematic, is when he starts to make the case that the 17.6-year periods that link key market tops and bottoms are, in turn, the product of a repeated and predictable sequence of 2.2 and 4.4-year cycles. Not only does it sometimes feel like the data have been tortured until it tells the author what he wants to hear, that level of precision is almost bound to come a cropper at some point. The predicted market low in 2013, which passed me by, is the most glaring case in point. What the subsidiary cycles do illuminate, however, is the interesting difference between 17.6-year bull markets (such as between 1982 and 2000 and, earlier, between 1947 and 1965) and the subsequent downturns (between 1965 and 1982, for example). Rising markets are smoother and fit the longer 4.4-year cycles while bear markets, especially as they draw to a close, are more volatile and require the shorter cycle to understand what is going on.
Which brings us to the fag-end of the current secular bear market that has been under way since 2000 and which Balenthiran believes will finally end in 2018, at which point a major bull market will get started and run until 2035. What I find most interesting about this prediction, and most useful for investors, is the insight that the final years of a bear market can be an excellent opportunity to build a position in anticipation of the rising market to come. From 1942 to 1947 was a period of volatile sideways movement which provided those investors who didn?t have other things to worry about with the chance to get fully invested ahead of the turn in sentiment.
I share Balenthiran?s big picture view that, at some point in the next few years, we will move out of the bear market that began in 2000 and that we are now laying the groundwork for the next multi-year upswing in equity markets. My biggest concern is not with this, or even his maths, but rather with a throwaway comment in the book?s conclusion that the predicted 2035 peak will coincide with his planned retirement. The human desire to see patterns all around us is strong and so too is our tendency to engage in wishful thinking. We all want to get out at the top.