Volumes give lie to hopes of sustained market bounce

US STOCK prices have jumped some 10 per cent since the end of May, even though the economic data has been almost universally shy of Wall Street expectations of late. It is clear that investors’ high hopes continue to trump deteriorating fundamentals.

The unseasonal upturn in the major market averages has prompted the diehard bulls to declare confidently that the latest move is just the beginning of a multi-year upswing in equity values. The never-say-die optimists argue that the conservative investor can reasonably expect a near-doubling in stock prices over the coming decade.

However, the bullish thesis conveniently ignores the fact that the advance off the crisis-depressed lows during the spring of 2009 has been accompanied throughout by unimpressive trading volumes – a development that reflects market actors’ unwillingness to sell equities in the face of the Federal Reserve’s ultra-accommodative monetary policies, rather than the robust demand that underpins secular upturns in stock prices.

The bulls remain undeterred and believe trading volumes will accelerate as the impressive returns since the spring of 2009, entice investors back into the market after more than four years of net selling.

Unfortunately, the belief is nothing more than wishful thinking, undermined in its entirety by the historical evidence. It took more than a decade for individual investors’ appetite for risk assets to return following the conclusion of the secular bear markets that extended from the autumn of 1929 to the summer of 1949, and from the winter of 1968 to the autumn of 1982.

More importantly, the argument also demonstrates a dearth of knowledge, at least when it comes to the supply/demand dynamics that underpin secular bull markets. Once the initial stage of a new secular bull market is complete, the major buyer of equities is neither individual nor professional investors, but the publicly quoted corporate sector itself.

An examination of the historical record shows that sustained, multi-year upturns in stock prices are always accompanied by merger waves that grow in intensity as the secular bull market progresses. Indeed, the phenomenon was more than apparent through the 1980s and 1990s.

This is not simply a modern development, however, and can be observed in the 1890s bull market, which saw the formation of DuPont, General Electric, Standard Oil, and US Steel; the 1920s upturn with its emergence of Bethlehem Steel, Deere, and General Motors; the “golden age” from the late 1950s through the 1960s and the growth of the “empire-builders”, including International Telephone Telegraph, Litton Industries, and Textron.

For those who question the relevance of long-term cycles that occurred several decades ago, the emergence of a new secular bull market in August 1982, and the developments in the years that immediately followed, should serve as a useful yardstick.