How long can this bull market last?
by Peter Switzer
The good times for share players might only have two years left to go and so if you are sitting on the sidelines dodging stocks, I hope you are getting a good return on your investments.
This is what I thought after talking to Shane Oliver from AMP Capital Investors on Switzer on Sky News Business Channel last night.
The political cycle
Shane is an economist and the investment guru for AMP and remains overall bullish on shares. He concedes that pullbacks are possible – sorry, probable – but the overall trend is up. And what gives a lot of confidence is the history of the political cycle in the US.
I explained this in my columns in late November and early December last year that American economic history shows that in the third year of a presidency the money supply is let loose and this cranks up economic growth for the third and fourth years rolling into the next election at the end of the fourth year.
Now QE1, which the first big money supply injection from the Federal Reserve, was done as a response to the threat of a Great Depression in the US as a consequence of the GFC, which created a recession in the States.
However, QE2 was at the end of the second year and partly explains why US shares have gone up 25 per cent since September. It has also helped boost company profits and employment, as well as driving unemployment levels below nine per cent.
The low greenback has also had a role to play but this too is linked to the Fed’s very easy money policy. That’s why some market experts say the end of QE2 will spook Wall Street.
It will be a big test but the strength of the economic recovery and the fact that interest rates are still so low makes me think Oliver’s political cycle theory holds a lot of merit.
He says history suggests that the third year is generally very good and the fourth is also good but not as strong as the third. I made the suggestion that as markets tend to try and second-guess what happens in six months' time, there will be get-out merchants in the second half of next year before the election.
One thing many believe is that the president at the start of 2013 will have to get to work on bringing down the US budget deficit which is around 10 per cent of GDP. This, in turn, will bring down the Yanks’ public indebtedness, which is over 90 per cent of GDP.
That could make life hard for a stock player in 2013 and 2014 but then in 2015 we could look to a new third year of a presidency again!
Well that’s the theory and I have to say I like it for the next 12 or 18 months but I will be watching how the US economic recovery reacts to the end of QE2.
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Published on: Friday, April 15, 2011
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