The investment world is experiencing something it has never seen before … a “rolling” bear market.  Sector by sector, industry by industry, the market has been declining for a year and a half.  Yet, overall the market has not declined!  It is a situation that has confused everyone.

The energy and consumer discretionary sectors are the most recent, and dramatic, areas of decline.  From a knowledge/service-based economic perspective, it is easier to grasp the decline in energy and other commodities.  But, the high end in the luxury consumer area?  Luxury goods providers have seen their stocks decline as much as commodity stocks … 40-50%!  Why have rich people pulled back their spending?  It’s fear. Throughout the world there is currently a social malaise; a malaise that has been sociologically and politically driven.  But it is on the cusp of change.     

 In the past, bear markets have always been monolithic.  In effect, all stocks would go down at the same time.  They generally would start declining after the Federal Reserve Board raised short term interest rates. Stock market strategist, Edson Gould, described this as his “Three Steps and Stumble” rule.  Each “step” was a hike in short-term interest rates by the Federal Reserve. The third hike was intended to slow down the perceived over-heated economy.  The “stumble” was the ensuing monolithic bear market.  But that was a rule applicable to an industrial economy. 

There was always this corollary to any recession; “The worse the recession the stronger the economic recovery.”  However, the great recession’s recovery was essentially flat with growth of two percent.  Any inflation concern was overwhelmed by the specter of deflation.  Deflation is invariably the byproduct of an over indebted economy (Japan).  American mortgages had been the largest asset class in the world.  However, 31 million of them were sub-prime.  The debt collapse was not typical of previous post World War II recessions and resulted in a dispirited recovery and stock market.  Against this backdrop – or because of it – we have experienced the second longest bull market on record.  One that has lasted for over seven years!  This is despite the unrelenting fear it has engendered.  It’s a market virtually no one wants to own.  About a year ago, I was sitting in a local restaurant with two friends who were clients.  I remarked, “You know I’ve come to believe if a client has a million dollars with me he probably has four or five million sitting in cash.”  Both nodded in agreement.  

The Russian economist Nicolai Kondratieff theorized a 50 year super cycle overlaying the typical four year economic cycle of expansion and contraction; cycles that are driven by major innovation such as the Gutenberg bible, cotton gin, computer etc.  Each innovation brings an upswing of social prosperity.  Such an upswing creates a social/political shift to the left.  However, in a downturn (such as now) things get difficult and society swings back to the right.  I believe the next major innovation, and resulting upswing, will come out of healthcare.  The current research boom in Boston is beyond description! 

-Francis Patrick Boland