The past 11 months have been challenging, if not treacherous, for investors. It has been tumultuous for investors in the speculative growth areas as many former leaders have declined 50%-75% from their respective highs.
When will the selling pressure lift be anyone’s guess?
However, during broad market declines, the strongest stocks or emerging leadership areas will often consolidate and show relative strength outperformance against their peers.
During this transition period, emerging sectors, industries, markets, and securities will form the necessary technical bases to take over future market leadership roles in the new bull market. Impressive relative strength via relative strength outperformance is often the hallmark of new market leaders.
In less than a year, we have witnessed one of the largest wars in Europe since the end of WW II. We have also experienced one of the most explosive global tightening cycles in the past 15-plus years. On top of this, global supply bottlenecks continue, lockdowns in China due to Covid-19 remain intact, inflationary pressures still exist, and slowing global growth persists.
These events and others can lead to a change in new market leaders. Those holding the leaders from the past bull cycle may experience a painful transition. However, for investors seeking new market leadership, this will be an exciting and potentially rewarding period.
What is the next investment theme for the next decade?
History has shown leaders of the previous bull market will not likely lead in the next bull market.
Market leaders tend to change and evolve. Macro, economic, and geopolitical events can lead to the emergence of new leadership.
Studying previous decades of market leadership can provide great insights into how market leaders change over time, but most importantly, help identify new leaders.
The investment themes by each decade are:
The 1950s – European Stocks – Soon after the Second World War, the European economy experienced explosive growth. This period is known as Europe’s Golden Age. The GDP of western Europe grew more than twice as fast as the GDP of other countries, resulting in European stocks outperforming peers.
The 1960s – Nifty-Fifty. Fifty large-cap stocks on the NYSE comprised buy-and-hold, blue-chip growth stocks. The common characteristics of these stocks were solid earnings growth and a high price-earnings ratio, with P/E ratios above 50.
The 1970s – The Emerging Markets and Commodities. During the 1970s, high inflation and nominal or uneven economic growth were the dominant themes. High budget deficits, low-interest rates, oil embargos, and the collapse of managed currency rates ushered in the stagflation cycle. Commodities and emerging countries with abundant natural resources and raw materials benefited.
The 1980s – Japanese Equities – During the 1980s, Japan emerged as a new superpower. Not a military superpower but an economic one. It was a decade of great economic prosperity in Japan. The economy was booming, and the made-in-Japan theme propelled many Japanese multinationals into global leadership roles.
The 1990s – US Technology and Telecom stocks. The proliferation of the Personal Computer and the internet led to the emergence of the US Tech/Telecom investment theme.
The 2000s – The Emerging Markets and Commodities. The 2000s witnessed a commodities super cycle. Following the Commodity depression of the 1980s and 1990s, commodities transitioned toward their next boom cycle. Emerging markets, including BRIC countries such as China, emerged as potential superpowers leading to strong demand for commodities.
The 2010s – US Large-cap Growth stocks. From the depths of the 2007-2009 global financial crisis/great recession, the 2010s witnessed the global acceptance of smartphones, Wi-Fi, social media, etc. Large US growth companies such as Tech giants AAPL, MSFT, GOOGL, AMZN, TSLA, META, etc., dominated the marketplace.
The 2020s – Commodities/Hard Assets/Value investments?
One specific catalyst that may offer clues as to the next market leadership is inflation. If the inflation trend is sustainable, then it changes everything.
Interestingly, in the past seventy years, there have been two Commodities super cycles (the 1970s and 2000s).
The two Commodities investment themes soon transitioned into 20-30 years of underperformance (commodities depression cycles), which set the stage for a leadership change toward equities investment themes.
If 2020 is another transition period from equities to a new investment theme (Commodities, hard assets, value style investments), it will impact everything from global interest rates, consumer demand, consumption, economic trends, savings, credit markets, equities, etc.